Wednesday, August 15, 2012

My Expose on the Chicago Plan

I posted this in response to Karl Denningers postThe Red Pill On Banking .  Karl is what I consider to be an important mouthpiece of the Libertarian movement and operates the Market-Ticker website.  Due to the importance of this subject matter to our future prosperity, this appeared to be a valid topic to preserve on my site. 

Then, what this says is a bank would have to receive an actual deposit, unencumbered by debt to make a loan. If they were lending actual money they possessed, there would be no need for the Fed. I think the problem is a lot deeper than that, in that depositors couldn't have immediate access to their funds, because they were all loaned out. This would mean, as I believe I have seen Karl comment, there would have to be 2 type banks, one of which never loans money, but merely holds it for customers.

Here is the rub on money. You hear this nonsense that money is going into the stock market, like it disappears. Money only changes hands or is created out of debt or disappears in the payment of debt to banks. It also cycles through accounts. Clearly the lending bank would have to also have an account at the deposit bank, because this is where the money is. Thus a lending bank would have to borrow out of the accounts at the deposit bank and I believe it would work more like the money market accounts. They would have to bid for funds and what they borrowed or loaned would merely change accounts. Whomever loaned their money to a lending bank would no longer have it.

The effects? For one, as lending went up, interest rates would also have to float upward. A fixed amount of money against a growing amount of loans would imply a growing need to acquire money, either through selling something or through productive enterprise. This would restrict boom and bust and discourage marginal investments. The idea we would have a Fed fooling with the rate of interest would destroy the entire self regulation of the system. Inflation and low interest rates are counter to each other and I believe we would have to keep the government out of this as well, as it would only take a short while before they were back into cronyism and destructive inflation.

In America's Great Depression, book page 71-72, Rothbard makes this comment. This is an important feature of economics, banking and government in that depressions are caused in large part by continual efforts of government and central banks to prevent true price discovery. A prime example would be the government subsidy for Solara or whatever that outfit was. Most people can't comprehend their wages declining and their standard of living increasing, but this is the true nature of a limited money system. It probably beats hell out of a system, where $30,000 a year today barely supports what $3000 a year did 45 years ago. Quote follows:

Just as in the case of the acceleration principle, the fallacy of the
“investment opportunity” approach is revealed by its complete
neglect of the price system. Once again, price and cost have disappeared.
Actually, the trouble in a depression comes from costs being
greater than the prices obtained from sale of capital goods; with
costs greater than selling prices, businessmen are naturally reluctant
to invest in losing concerns. The problem, then, is the rigidity
of costs. In a free market, prices determine costs and not vice versa,
so that reduced final prices will also lower the prices of productive
factors—thereby lowering the costs of production. The failure of
“investment opportunity” in the crisis stems from the overbidding
of costs in the boom, now revealed in the crisis to be too high relative
to selling prices. This erroneous overbidding was generated
by the inflationary credit expansion of the boom period. The way
to retrieve investment opportunities in a depression, then, is to
permit costs—factor prices—to fall rapidly, thus reestablishing
profitable price-differentials, particularly in the capital goods
industries. In short, wage rates, which constitute the great bulk of
factor costs, should fall freely and rapidly to restore investment
opportunities. This is equivalent to the reestablishment of higher
price-differentials—higher natural interest rates—on the market.
Thus, the Austrian approach explains the problem of investment
opportunities, and other theories are fallacious or irrelevant.

There seems to be a belief that dollars have babies, but they don't. Reserve bank lending is based on the idea that there is more money available than has been created, as money originates with banks and interest is attached. The concept of an expanding money supply has little to do with the economy and a lot to do with keeping the loans on the bank ledger performing. Thus more and more collateral is needed to keep the system going and more money has to be created to pay the interest that is coming due. The public is faced with the dilemma of struggling to pay what they owe, file bankruptcy or borrow more and the banker is faced with the dilemma of either lending more or writing their loans down out of their capital reserves. Increasing bank capital is nothing more than accounting for money that never existed in the first place, through the addition of more money that never existed. Fed policy is based on buying assets bought with money that never existed with notes that can be exchanged between banks and other banks and between them and their customers. All compound debt.

Under a gold standard, there was always the gold. I find it highly doubtful that trade beyond borders could be established out of purely government issued money. The whole thing would be a farce. Gold was eliminated through debt and collateral, not because the government could print money. We are now totally in a legal tender for payment of debt and outside of this factor, the ink on a dollar is worth more than the paper. But our houses are valued, our businesses are valued, our cars are valued and through the income tax, the government establishes a bondage that demands this money. The basis of the dollar has little to do with its real worth, but in the structure of debts internationally. Should it fail, it would be necessary to go back to a gold standard to repeat the process, as this would imply the structure of international debt had come unwound and there would be no use for dollars. This is why the dollar is king and the yuan has little international value.

Where I carry this theory forward is that debt in the system is nothing but compound interest piled up as money. This probably leads into a gold bug idea that gold and silver were the base of the current system and are all that remain of the non compounded interest. Due to Breton Woods, the US has to produce all the debt to keep the world system afloat, thus we had $5 trillion a year in new debt coming into the system at the bubble peak and since then, much of the rest of the world has run into trouble. In the 1990 period, the US slowed down and there went Japan. Once the US began expanding again, the excess went to China, not Japan and the advent of the Euro gave the Southern European countries access to some of the credit. Bubbles appeared in these countries along with China, even though Japan continued to deflate. China continued the boom, attempting to use their own credit, but such an expansion cannot go on and wouldn't have made it this far if not for the rigged game the Chinese banking system is. There has been no price discovery allowed in China other than exports and as such all kinds of misallocations of capital have been allowed to go on.

Creating debts that involve the money supply and having more money due than is possible to pay back, as the banking system has been allowed to do through state and national charter, has to be changed. If this is changed, government interference in the price discovery mechanism also has to stop. Lending out of the money supply should be done at the risk of the indivdual depositor at market rates, set without any interference by the government. The idea we need more money by diluting the money is like deciding we need more whiskey and getting it by filling the half empty half gallon bottle with water. This might work if you drink your whiskey with water, but it would be wise not to add water when making a drink, at which pace you would run out the same time. This can be illustrated by the fact that $30K a year is about what $3000 a year was 45 years ago. 10 times as much liquid, but the same amount of booze.

Lastly, I have suspicion of any thing that comes out of Chicago. I would suspect the University of Chicago was behind this and the Rockefellers bankrolled that institution. The Rockefellers also were behind the creation of the Fed, Nelson Aldrich being one of John D's in laws. Rothbard's Origins of the Fed covers much of the 15 year smoke screen employed to sell the Fed to the government. Worth reading at the following link.

1 comment:

Escrava Isaura said...

Mann, outstanding work as usual.

I am a great fun and follower of you. Probably have printed all your entries and comments that I can put my hands on it.

I use many of your quotes and analyses on my ‘newsletter/email’ that I send to friends and colleagues. Everybody that knows me…, heard of Mannfm11.

Wondering in your busy internet life if you had a chance to check Anthony Migchels at Real Currencies [link here].

Please, make this effort. You facing Anthony Migchels would be priceless for your followers.

Again, thanks for sharing you knowledge and great insights. Escrava Isaura.