This is a guest post by James at the Winter Patriot Community. The original can be read here. This post grew out of a discussion in the comment thread at our last post, BS Labs.
Many moons ago scientists thought the heavens revolved around the earth. They had fashioned theories and equations to verify this. But every now and then a planet would be observed moving backwards. How was this possible?
Explanations were put forward and some involved very complicated maths to 'prove' how this was possible. Of course, only educated/trained and intelligent people could follow these explanations. So the average person of average intelligence and average education had no way of credibly arguing with these 'scientists'.
But a critical foundation that these complex calculations were based on was wrong.
There was one crucial piece of information, one crucial assumption that was backwards. And that was that the heavens, including the planets, revolved around the earth. They did not, of course. Now with this piece of missing information, the average person today can see that all these complex calculations and theories and all the disputations that occurred between the scientists were meaningless nonsense.
So it is with economists and their theories today. And similarly, we don't need to understand the complexities of their false arguments to understand how they are simply wrong. There is a fundamental equation in economics and understanding it is crucial to seeing the nonsense that is peddled as economic management today. It is simple and well known to economists yet seemingly few economists have any idea of the truth and therefore the power that rests in this simple equation. It is the economic equivalent of Einstein's E=MC2.
It is this. P=MV
P= production i.e. GDP or the total value (denoted in dollars) of the wealth created by people in a country in a given year.
M= the size of the Money Supply (M3) we all have to buy that wealth that was created (GDP). (M3 is the amount of notes and coins [M1] together with the total credit balances in all the bank a/cs in the land [M2] plus some Bills of Exchange and a couple of other things I don't understand!)
V= the velocity of the Money Supply i.e. how fast people spend the money they get. In boom times the money supply (M) will turnover 1.1 times overall in a given year. In depressed times it will turn over 0.9 times. SO for our purposes we can say it turns over on average of 1.0 times which also means we can leave it out of our calculations without affecting the outcome.
So simplifying this down, Production and therefore employment) will rise (or shrink) to the level of Money (M) available to purchase said production.
So increasing Money Supply leads to increasing prosperity until the productive capacity of a nation is totally employed. Then if M is increased further the prices of Production and not the amount of P will increase to match the level of Money. i.e. we now have price inflation.
This is what happened in Weimar Republic in Germany in the 1920's. The private banks printed massive amounts of money (while blaming the government for it ever since) and lent it into the economy and massively inflating the price of any goods on sale. The purpose was to collapse the economy, destroy people's savings and buy up assets with foreign currency at fire sale prices. It worked.
On the other side of the Atlantic a few years later in the 1930's, the bankers reduced M (the Money Supply) to one third of its level of the 1920's and created the Great Depression with its price deflation. It also wrecked the economy and caused massive hardship.
So controlling the level of money (regardless of whether it is gold backed or not) is what determines a sound economy. Too much and you have inflation; too little and you have depression and deflation. Having too much and keeping it out of the productive economy and channelling it into speculation, as at present, will result in both inflation and depression at the same time.
It is a very simple and very understandable mechanism. Hence the mountain of economic jargon and nonsense to hide this simple truth that regulating the amount of money in the economy to make full use of the labour and resources available will result in a stable and prosperous nation. This is the last thing the banks want as it is nowhere near as profitable for them. Besides, what's the point (for them) of being rich if every one else is rich, too?
If the government also creates this money itself and therefore pays no interest to any outside banks, then the nation will have no national debt either. Imagine that; a government that had no debt and could never say it had no money to fund whatever projects there were people and resources available for!
This was the situation in the prosperous American Colonies-
“When Benjamin Franklin was called before the British Parliament in 1757 and asked to account for the prosperity in the American colonies. He replied, "That is simple. In the colonies we issue our own money. It is called Colonial Scrip. We issue it in proper proportion to the demands of trade and industry to make the products pass easily from the producers to the consumers. In this manner, creating for ourselves our own paper money, we control its purchasing power, and we have no interest to pay to no one."
It was the struggle for financial sovereignty that precipitated the American Revolution when the (Rothschild) Bank of England forced the colonists to give up their own currency. That war never ended.”
The above quote is from an excellent and wide ranging article by Nikki Alexander from the invaluable Information Clearing House. Reforming the Global Financial System-Flushing the Parasites
This article has a list of further links to excellent writers on this subject. For further reading on how money is created, see my article of a couple of years ago- Warring World Part 4b Introduction to "The System" (cont)
What every country needs is for its representative government to be the sole issuer of ALL monies with banks unable to create credit through checking a/cs and credit cards. They would be reduced to lending money from their own reserves just as building societies do now. They would become the financial intermediaries they have claimed to be all along.
Prosperous conditions can be easily achieved by matching the amount of money issued (at low or no interest) with the productive capacity of the population. This ensures full employment with no inflation. It's exceedingly simple.
The govt can issue money by either spending it into the community (to pay for social security or infrastructure projects at no cost to anyone) or lending it into the community through low interest loans (the interest from which would be income for the government)
The end result from this simple move would be a peaceful and prosperous country with little to no taxation.
A currency is given worth by the people who do the producing. So a country's Money supply is backed by the country's GDP (the total value of a country's Production of goods and services in a given year). That is always the underlying reality whether or not you can exchange a dollar for a speck of gold or not. The point of having gold as the so called backer of the currency is to give control over that same currency to those who own the gold and we are back to square one with the "boom and bust business cycle" and its attendant instability.
In a society with a gold backed currency, the owners of the gold will limit how much money we can have and so also limit the wealth we can create for ourselves and keep us forever dependent on them.
After the Spanish started stealing gold from South America centuries ago, they experienced a booming domestic economy. It was simply because the extra gold was converted into extra money which allowed extra production to be produced and traded.
They could have experienced exactly the same thing by having a properly managed fiat currency. Fiat currencies are not backed by hot air as many would have us believe. They, like ALL currencies, are backed, in fact, by the amount of goods that can be bought with them - the country's GDP which is the productivity of the people. That we have inflation and deflation to adjust the price of goods and services to over time match the amount of the Money Supply is ample proof of the fact that a currency is backed by the nations GDP regardless of what it is said to be backed by.
That is why the money supply belongs to the people as a whole and it is a theft of grand proportions on the part of bankers to have dispossessed us of it.
Ron Paul with his 'gold backed currency' is playing directly into the hands of the bankers he says he is against. He should be avoided for that very reason regardless of what anybody thinks of his motivation and whatever else he might say.
If you can exchange your digital or paper currency for gold, it is still not much use to you if you can't exchange the gold for goods for whatever reason. So the gold, too, is given its value by the goods that are exchanged for it. This applies to every medium of exchange. That's is why you have it; to exchange it for goods and therefore it is the goods that give it its value. Goods that are created by productive people and who are willing to accept your gold for it.
Gold is attractive only because currencies are kept unstable by private bankers who have no interest in having a stable money supply. It is worth bearing in mind that these same bankers also control all commodity markets including the gold market and regularly run it up and down to suit their own purposes which always amount to taking wealth out of your pocket and putting it into theirs without providing anything of value in exchange. This is also known as stealing!
Ron Paul is currently popularising the idea of a gold backed currency together with a form of Laissez-faire economics i.e. little to no government planning. His chief intellectual source for all this is the Austrian School of Economics which was formed around economist Frederich Hayek's writings on economics and politics.
Hayek's book, "Road To Serfdom" is a compelling argument against big government. It describes the weakness of human beings in the face of weilding power over others and the corruption this brings to the human mind. No argument there from me, at all.
The flaw in Hayek's thinking, though, is that ejecting the govt and leaving the economy to a laissez- faire system is getting rid of the problem. It doesn't. The problem is the bankers that weild power over the government and not the government itself. The bankers have power over the markets as well. Because they literally own the market places (the NYSE, for instance) and the clearing houses, they can do what they like with the markets through the simple but fraudulent practice of short selling; selling what they do not own into a market and driving the price down. The gold market is far larger than all the gold mined in history.
The bankers are free to control commodity markets and the lending market, otherwise known as the Money Supply, whether under a so called government planned and controlled market or a laissez-faire one. Either way they are free to make the money supply and to vary the size of the money supply at will under whatever political and economic philosophy is in fashion. The effect of periodically shrinking the Money Supply is what causes the otherwise mysterious “Business Cycle” of boom and bust.
It is this mismatch of money supply quantity and the quantity of resources of a community or nation that is THE fundamental problem. Laissez- faire economics does NOTHING to alleviate this primary problem.
Regarding “hard currencies”, having productive resources such as physical labour, intellectual skills, raw materials, machinery and productive land all sitting around idle because the nation does not own enough gold to allow it to print enough money to facilitate the use of all these idle resources while people are without housing and food is just plain nuts! Worse, it is criminal. It is the kind of insanity that is the hallmark of evil.
This is exactly what happened in Australia during the Great Depression. The Bank of England withdrew the gold it had lent to the Australian government so the government had to shrink the money supply to match the amount of remaining gold it had. Massive human cost ensued. The bankers would do it again in a flash, I'm sure.
The Austrian School's explanation of the mysterious 'business cycle' comes closest, in my view, of all the economic 'schools' to the truth of the cause of this mysterious cycle of boom and bust. But it puts the blame for the varying size of the money supply at the feet of interest rates as if bankers' behaviour was completely determined by the interest rate of the day and not their own rapaciousness. The blame lies squarely with the bankers and their lending policy i.e. how much they are willing to lend regardless of what the interest rate is. It should be obvious but it apparently isn't. Amazing for such great intellects. No?!
So Ron Paul and the Austrian School of Economics would leave us to the predations of the bankers without any control over them.
Pitting the Austrians against the Keynesians is a classic Hegelian Dialectic ploy. I liken it to a game of tennis where the 'opponents' are actually co-operating in putting on a show and captivating the spectators attention when, as in this case, we should be looking outside the court. Perhaps at Douglas' Social Credit, for instance. But more on Keynes and Douglas in a moment.
I mentioned the equation P=MV earlier. The meaning and it's working appear simple and straight forward and they are. It is usually taught in first year economics. But what is not taught is that the banks manufacture M, the money, and that they increase and decrease the level of this money at will and so assume near total control of the economy (Production) as a result; increasing it and decreasing it as they please through their lending policies. This is the primary cause of the “business cycle”.
P=MV. If the Money Supply is reduced by calling in overdrafts and reducing lending, so is the Production also reduced and we have a recession/depression. If the banks increase the Money Supply by lending as much as they can and putting to work idle capacity, then the Production increases and we have a boom. There's no mystery to it once this fact is understood. The banks run the economy up and they run it down and profit both ways at our collective expense. All the convoluted theories are nonsense in the face of this fact.
Now that you have the missing piece of information, if you want to read some real nonsense from some highly paid idiots, have a gander at this!
The Keynesian model of government intervention and planning is seen widely as a failure because of the massive govt debt that has been built up. And this was the fatal flaw in his theory i.e. the way it was financed. But if the government deficit budgets were financed by govt owned central banks, then all would have been fine. Financing the mounting govt deficits from private banks played into their hands. Keynes' excuse was that if he didn't support private bank financing, then his theory would not have been adopted at all.
The adoption of his theory gave immediate relief to the general populace (evidenced by some decades of prosperity) only to create a bigger problem down the track (which we have now). Hence the real reason for his comment, “We are all dead in the end”. Keynes also became Lord Keynes which was a nice reward for not elucidating on the flaw in it to everybody.
There was a large and growing discontent with bankers and govts and the way they managed the economies at the time. The adoption of Keynes' theories may have been a successful attempt to derail such movements as C.H. Douglas' Social Credit movement. I'm sure Keynes borrowed heavily from it in forming his theories except Douglas' model would have cut out the banks and the debt. Douglas explained the problems with classical capitalism far clearer than Keynes subsequently did though they were speaking about the exact same problem.
Douglas was an engineer and it has struck me that all the best writing on economics over the years has been written by engineers. I think it is because they are schooled to take the cause and effect relationship very seriously and not be put off by vague or woolly explanations.
C.H. Douglas' writings
Keynes claimed rightly that the economy was determined by the aggregate level of business and consumer demand and that this level of demand was chronically under funded for full employment. So it was the opportunity and even duty of the government to provide this funding through deficit budgets. This would have worked well if not for the fact that the deficits were funded by private banks at interest, as we've noted, which created the long term debt bomb that we are left with now. If governments around the world had financed their deficits from State owned banks, this problem would be non existent today and our economies would be in fine shape. Instead, now the economies around the world are being choked and smothered to pay the bankers their illegal and immoral interest.
Another problem with Keynes' theory is that he did not explain clearly WHY capitalist economies were chronically under funded. He had no excuse as this under funding was explained very simply and very clearly more than ten years before by Maj C.H. Douglas in his writings on his Social Credit movement.
As Maj. Douglas explained, given that we know that almost all money comes into being as loans and the vast bulk of these are for industry, we can see with a little thought that these loans cover the manufacturing costs (the outgoings) of production. But on top of these costs there needs to be a margin for bank interest on those loans and a margin for profit in the final sale price of manufactured goods (and services). These added margins are unfunded and the money to pay for these margins does not exist.
The money to cover the manufacturing costs (provided by the investment and business loans and operating overdrafts) has been spent into the community to cover wages, raw materials and plant costs (which break down to wages sooner of later) and so is available to pay for that component in the sale prices of the production. But the money needed to pay for the margin to cover bank interest and profit for the enterprise has not been spent into the community by the manufacturers and therefore is missing from the community. The community is too poor to buy all the production that it collectively manufactured.
So unless consumer credit is issued to the public, there is not enough money (M – Money Supply) to buy the full production (P – production or GDP) and this inevitably leads to goods being left on the shelves and to growing unemployment.
For an example using some figures. Let's suppose an economy starts the year without any money supply. Industry borrows (at interest) 100 billion dollars to finance their production programs. That money is spent paying for wages and for raw materials. Now industry has spent all its money and the community has a money supply of 100 billion dollars. The manufacturing sector now wants to sell all of its production and also to sell it at a profit.
So it's costs are the $100b loan plus $10b bank interest ($110b), plus it wants to make a profit of 20% so it puts a price of $132b on its total production. But the community only has the original $100b that it traded its labor and other resources for to pay for the output. So $32b worth of stock is going to stay on the shelves unsold. What do you think will happen next?
Yes, industry will lay off workers and scale back production and we have an economic recession unless the public can borrow enough money through consumer loans to pay for the remaining production on the shelves.
The other option (and the one Keynes opted for) was for governments to bring in a deficit budget i.e spend more into the community than it received in taxes and finance it through loans from the private banks (who create the new money out of thin air, of course). Because of the temporary nature of loans and the fact that they attract interest, this solution just postpones the problem till next year and then the situation requires an even bigger loan (because of accumulating compounded interest) to pay for the same manufactured output.
The problem with supplying the shortfall in the money supply with consumer credit is that it is secured against future wages that will be needed to purchase future production. It will accrue interest as well taking more money out of the community that is needed to buy future production. So we have a short term solution that creates a much worse long term situation. If, instead, the government provides for this shortfall with deficit budgets financed by private banks, we get the same problem. In practice we have a combination of both these very unsatisfactory arrangements of badly financed government debt and consumer debt.
(As an aside, this is why we need a constantly growing economy to just stand still.)
Maj. Douglas' solution was to distribute money to cover this shortfall of funds (the $32b in our example) free as a dividend to all citizens. This money would then swell Aggregate Demand to the level of GDP or Production and ensure a fully employed workforce and a prosperous nation with a minimum of downstream social costs and all very simply done. Other solutions could be equally as effective so long as the money was spent into the community by the government at no cost to itself such as through State bank funded infrastructure projects that would not have to be sold to the population and so not absorbing valuable money supply.
Because Keynes did not explain the mechanism, the problem, or the solution clearly and fully as Douglas did (though nowhere near as widely), it left the citizenry in the dark as to what was happening and thus we all became victims of the banks and to the competing nonsensical economic theories they have sponsored down through the decades to keep us all bamboozled as they continue to rob us blind.
The bankers have robbed us of much more than money, too. They have robbed us of happy, healthy and peaceful societies. They have robbed us of many family members from poor health and depression due to poverty and uncertainty and not to mention from their wars for profit.
Here's a site that explains very well in the form of a story (in text and audio) what has happened to us and how we have come to be dominated by bankers. The Earth Plus 5%
I hope I have shown that prosperity and peace of mind for everyone is attainable with collective knowledge and political will. I hope I have shown that economics need not be a convoluted and 'dismal science'. I hope it is now possible for it to be seen as a simple, straightforward and even exciting discipline given the possibilities that lie before us for personal and cultural advancement.
I'll finish with a final quote from Nikki Alexander's excellent article linked above-
“Money and credit can and should be used to keep the economy flowing, facilitating the exchange of real goods and productive services that meet the needs of society ~ without fabricating debilitating and fictitious debt. This, in fact, was the intention of Article 1, Section 8 of the United States Constitution that authorized only Congress to coin money and regulate its value. The founders of our nation understood that a government does not need to borrow its money from a private corporation. It has the power to create its own money. We are that government and that power belongs to us.” “Our government has the constitutional authority to create money and issue credit without ever charging interest or creating debt. It can directly spend this money into circulation and extinguish excess currency to prevent inflation. Or it can charge a reasonable interest rate and use this revenue in lieu of taxes.”