Friday, June 22, 2012

Is Economic Value Subjective?


Objects have no value without a valuer. It is a valuer's desire for an object that allows us to impute that object with a value.

We have the economists of the Austrian School of Economics to primarily thank for this “subjective theory of value.” Their insight explains how the market enriches those who trade. Each time a trade occurs in the market, each party to the transaction values what he receives more than what he gives.

Subjective valuation serves as a basis of modern economics because it is so right as a first approximation of what is happening, but to go further with the brilliance of the Austrian School's economics, we need to reexamine some objective contributions to economic value.

Value is relational – as important as its subjective character is, it is ultimately about a relationship that exists between the valuer (the subject) and the valued (the object). Sometimes it has the very subjective nature of a simple desire of the valuer, but sometimes it also reveals the specific relationship between the valuer and the object.

For example, the Austrians explain interest as the difference between having a good in the present and having that same good sometime in the future. They call this difference “time preference.” The amount of time preference is a result of the subject's mind, but the fact that it exists and must exist is a result of the object's location in time.

Like time preference, it can be said that there is also a space preference. A subject naturally prefers a pizza from a certain chain restaurant near his home in Denver to the same pizza from the same chain restaurant in New York. Because of the objective condition of space, the one in New York is virtually valueless to him.

Murray Rothbard would say that the pizzas are actually different and their different values can be attributed solely to their being different objects. He argued that ice in winter is a different object than it is in summer, explaining why it is valueless in winter and refreshingly valuable in summer. If it has a different value it must be a different object. But, preserved in a freezer, it is, in fact, exactly the same object. In this case, Rothard, genius though he was, was stretching subjectivity in vain to explain all value differences. The ice's value has changed because it is the relationship between the subject and object, between a man and the ice positioned in time, that has changed and it is the relationship itself that creates the value.

Time preference is a preference for the SAME object located at a more proximate point in time. The object is not a different object because the subject has to wait for it.

Economic value comes from a relationship – a relationship that could not exist without the subjective intent of the valuer but must also involve the object's existence in time and space.

Friday, November 18, 2011

Money is Debt

Modern money is created by debt and therefore the supply of our money fluctuates with the amount of debt that exists in our economy. An economy expands into a boom period when people are sinking deeper into debt and it contracts into a recession when people are acting responsibly and paying down their debt. The irony of our modern monetary policy is that recessions are the result of people climbing their way out of the hole of debt that they have dug themselves into and economic booms are really just artificial bubbles that are the result of people borrowing money that they will eventually need to repay.

Whereas at one time money was a made out of something that had an intrinsic value, such as gold, most of today’s money is just a claim to a debt between a bank and one of its borrowers. When the amount of debt goes up, the claims to those debts increases and thereby increases our money supply; when the amount of debt decreases, the money supply decreases.

How does debt turn into our money supply? A small portion of our money is real; it is printed currency and does not represent someone’s debt. However, this currency represents only a small fraction of our money supply, serving as only a seed to vast amounts of money that is produced by our private banks. Our real money supply, known as M1, includes this currency, regardless of whether it is in your pocket or your checking account. However, when that currency is deposited in your checking account it no longer exists as currency. The bank has loaned most of this currency to a borrower who now has it in his pocket. That money that counted as part of M1 when you deposited in your bank still counts as part of M1 but it again counts as part of M1 when it is in the borrower’s pocket.

The currency cannot exist in two places, but the bank fraudulently represents that it exists in both the borrower’s pocket and in your deposited account. The bank, using its ability to produce account balances on paper, has effectively duplicated the money that originally existed as currency. The original amount of currency still exists, but there is twice the amount of money on paper. On paper, the original currency has been duplicated.

The money that has been duplicated gets duplicated again when the borrower deposits the money in his account and it gets loaned out again. This process continues until eighty percent of the money in the economy has come into existence only through the making of loans by the private banks. The money that we believe we are spending is largely just a debt that can evaporate when the borrower chooses to “Neither a borrower nor a lender be.”

Wednesday, June 8, 2011

How Local Banks Cause Inflation

What is money and how is it created? The answer to that question is that most of our money is created by our local banks. This counterfeiting behavior of our local banks is the reason why our economy inflates and has recessions.

For example, suppose you have a nice, crisp $1,000 bill and you wish to deposit in a bank for safe-keeping. The bill’s claim to reality is that it has its own unique serial number; the serial number gives it its own identity as a member of the money supply (what is referred to as the M1 money supply). After it is deposited in the bank, it is mixed in with other members of the M1 money supply and your checking account is credited $1,000. The conversion of your money from a bill to a balance in a checking account does not affect the money supply because the balance in your checking account is also included in the M1 money supply (economists correctly assume that the money is still in existence although it has changed locations).

However, the money that you believe is in your checking account does not really exist there. The bank is allowed to use that money for its own purposes – it is allowed to use it in a loan that provides income for the bank. This is where the M1 money supply gets perverted by the misleading behavior of our banks. The money that you believe is in your checking account is loaned out to someone else who invariably puts in into his own checking account. When this happens the M1 money supply is increased, because, as we have stated earlier, the money in a checking account, including this borrower’s checking account, is treated as real existing money just as the original $1000 bill was. In other words, the original $1000 dollars that was a part of the M1 money supply has become $2000 in the money supply by the simple action of the bank’s making a loan (actually, the amount loaned out is usually a little less than the full $1000 because of the bank’s requirement to keep a small fraction of the deposit in reserve).

Each time that a local bank loans money from a checking account, it adds to the money supply, inflating the economy and cheating every person wise and lucky enough to have savings; and each time it forecloses on a mortgage or otherwise closes a loan, it subtracts from the money supply, making payrolls harder to meet and endangering the jobs of hard-working citizens. As the money supply expands and contracts through the machinations of our bankers, our savings and our jobs increase and decrease in value, leaving us the victims of bubbles and busts that are underwritten by the politicians who protect the bankers that finance their elections.

Friday, April 15, 2011

Recessions and Our Fraudulent Banking System

Recessions are caused by an unstable money supply. Recessions, like the one that we have been in for the last three years, are not the result of a lack of consumer confidence and they are not cured by deficit government spending. Regardless of what the primitive Keynesian economists tell us, the unemployment that characterizes a recession is simply the result of a money supply that makes employees a bargain during a period of monetary expansion (inflation) and an intolerable burden during a period of monetary contraction (deflation). One of the goals of the following posts to this blog will be to demonstrate the necessary connection between recessions and an unstable money supply.

So, the question has to be asked, if a recession can be avoided by a stable money supply, why can’t a government simply keep the money supply constant and make its citizens happy and employed. The answer to such a question is simply that governments do not have control of the supplies of their own money because they support and protect banking systems that are inherently corrupt, fraudulent, and economically destructive – banking systems that allow banks to produce their own form of counterfeit money – what is called fractional reserve banking. It is another goal of the following posts to this blog to educate the readers, in plain language, how banks inflate the economy by creating their own money from nothing and then deflate the economy by destroying that same money and returning it to nothing. Employees are a bargain during inflationary periods and are a problem when money again becomes relatively scarce (deflation).

Fractional reserve banking cannot be justified legally on any grounds, nor can it endure the moral scrutiny of an informed people. It is simply fraudulent in that it is founded upon false pretenses and has the effect of taking people’s wealth without their knowledge or consent. Fractional reserve banking is simply the result of greedy bankers and dishonest or ignorant politicians and judges. A third goal of the following posts here will be to show how fractional reserve banking is inherently criminal in nature and in its effects upon innocent people.

There is a wonderful book on the damaging effects and underlying illegality of our federal reserve banking system. Money, Bank Credit, and Economic Cycles, by Jesus Huerta de Soto. It is a scholarly (yet readable) work that is perhaps worthy of a Nobel Prize for its author. This wonderful work describes in accurate detail the criminal nature of fractional reserve banking, how it necessarily leads to recessions, and how governments are powerless to protect us from its effects. Unfortunately, it is a tome of nearly 900 pages and will therefore not be read by the people who need its information the greatest – the average voter. Its basic premises, however, are relatively simple and can be published in blogs such as this one.

It is the intent of this blog, therefore, to show clearly and in plain language the following three truths that can not only prevent further recessions, but can help protect hardworking people from having their savings diluted and destroyed by greedy and irresponsible bankers:

  1. Recessions and high unemployment are the result of a money supply made unstable by fractional reserve banking;
  2. Banks create money from nothing by fractional reserve banking, rendering the government unable to stabilize its own currency; and
  3. Fractional reserve banking is inherently deceitful, destructive, and criminal in nature.

Friday, June 19, 2009

Depressions and Their Solution

This is a simple outline of what depressions are and how they are solved. The problem and its solution are simple and should be understood by every voter. It may take a little effort, but the answers are available to us all.

(1) The market, if left free of government intervention and other forms of fraud and misappropriation, is immune to serious economic downturns (Say’s Law). There will always be individual business failures, but the misfortune of one person in the free market is another person’s opportunity. The same amount of material wealth in the economy remains the same; there is just a change of ownership. Because of this balancing of fortunes and the fact that the total wealth of the economy remains the same, there should never be epidemics of business failures.

(2) Business failures reach epidemic proportions because there is a change in the money supply. A reduction in the money supply, referred to as deflation, means that there are insufficient funds to maintain the demand for goods and services at existing prices. This change in demand reduces trading and creates employment. This is the essence of a depression. There is the same amount of wealth in terms of real goods and services but there is not enough money to purchase them.

(3) All that needs to be done to prevent depressions is provide a money supply that cannot be reduced. If the money supply were stable, there will still be goods on the market that are overpriced, causing business failures, but the money of the economy would be directed to cheaper alternatives. These cheaper alternatives would provide new business opportunities to offset the losses, preventing business failures from reaching the epidemic proportions that are characteristic of depressions.

(4) Durable commodities, such as gold, do not disappear and therefore can serve as a money supply that would prevent depressions from happening. In turn, government issued money can be made stable and can also serve an economy that is depression-free. Even if a government caused inflation through deficit spending, it would not necessarily lead to a depression, since the government’s money would still not disappear and thereby lead to the reduction of money that would cause a depression. This inflation would cause a misallocation of the economy’s resources and reduce its overall productivity but it would not lead to the unemployment that is caused by a reduction in the money supply.

(5) However, the US government, along with the other governments of the industrial world, cannot provide us with a money supply that is invulnerable to depression-causing deflation. Why? Because governments have no control over the creation of most of the money in their own economies – banks do. To see how this is done, please read the previous post to this blog “Our Money is Not Real” below. Through fractional-reserve banking, banks are allowed to multiply the government issued money up to six times through issuing credit on money that they do not really possess. This money exists on paper only and can disappear with the application of more paperwork. When our banks contract their credit (reduce the loans outstanding), the money supply of the nation is reduced and a depression results.

(6) The fractional-reserve banking is solely responsible for our recessions and depressions and it is nothing more than a form of fraud that our governments allow bankers to perform upon the rest of the economy. It is supported legally through transparent legal fictions that actually contradict each other and make no sense. The primary fiction is that bank deposits are not really deposits, but rather, are loans. But if this is the case, then the depositor commits fraud every time he writes a check on money that he has already loaned to his banker. An accessory to the depositor’s fraud is the banker who honors the check even though he has already borrowed the money and loaned it to another customer.

(7) Depressions can be brought to an end if the lawyers and judges of our country consistently apply the laws of fraud to the bankers who duplicate and triplicate our money during boom times and then reduce that money to vapor when they contract that credit.

Tuesday, June 16, 2009

Indeflation

Indeflation is the phenomenon that turns a curative recession into a disastrous depression. It is what happens when a government attempts to stimulate its country’s economy with inflationary spending but, paradoxically, causes that economy to further deflate and sink deeper into a state of high unemployment and falling prices. It happened in the Great Depression; it has happened again in Japan’s ongoing depression; and it is happening now in America under the misguided leaderships of George W. Bush and Barack Obama.

The term “indeflation” is not being coined for the first time here; it lives on the internet, where a working definition can be found at http://mileslater.wordpress.com/2008/05/05/indeflation/. According to that site, “INDEFLATION is the production of traditionally inflationary observations and reactions causing deflationary results.” The seeming paradox of inflationary reactions actually causing deflation, along with all of the unemployment that comes with deflation, can be explained very simply. It might seem like a paradox, but it is actually the natural consequence of a government attempting to prevent an economic correction that cannot be denied.

To understand how indeflation happens we must begin by recognizing that a recession is a curative process whereby market prices go down to correct their overpriced state during a preceding bubble. If left to run it s course, a recession results in a lower volume of money but approximately the same amount of goods. Because of the lower volume of money, the same goods sell for a smaller price. The inflation caused by the preceding bubble is corrected by the recession’s deflation.

However, governments tell us that they can prevent the corrective process of a recession and keep us in the bubble of poor investments that we have made for ourselves, and this is how the healthy process of a recession gets turned into the unhealthy state of a depression. The government, regardless of its leadership under either party, attempts to prevent a recession by “stimulating” the economy with deficit spending. Hoover did it, FDR did it, Bush did it, and Obama is now doing it – governments, unfortunately, do it. This stimulating deficit spending is intended to inflate the economy and undo the corrective work of the recession’s deflation, however, the needed correction cannot be denied and these attempts at inflating the economy will have the effect of actually further deflating the economy, causing more unemployment and increasing the misery of the adjustment process.

The government’s attempt to create inflation actually causes deflation because that government is only one of many producers of money. Banks, by issuing credit, actually produce money, just as they destroy money be withdrawing credit (to understand the simple mechanism of credit expansion and contraction, see the previous post on this blog). The one large inflater, the government, has the effect of activating thousands of small deflaters, the banks attempting to remain solvent. The cumulative effect of the many deflaters far exceeds that of the government – the deflationary credit contraction of banks exceeds Obama’s inflationary spending.

As a model of this indeflation phenomenon, let us take a hypothetical miniature economy where the government has issued and distributed $1,000. According to monetary theory, when the initial $1,000 gets deposited in a bank, the bank “multiplies” that money by loaning it to borrowers at the same time it makes it available to the depositors – deposited money gets duplicated and then duplicated again. Economists even have a formula that determines how much that initial money supply gets multiplied by the bankers. It is simply expressed as “1/R” where R represents the amount of reserve the bankers must keep of their deposit money. Since R is a fraction, usually around 1/6, the result of dividing it into one simply results in an inversion of the fraction: a 1/6 fractional-reserve requirement means that the banks can expand the money 6 times and a 1/8 fractional-reserve would mean that the banks can expand the initial money supply 8 times.

So, to elaborate on our simple model economy, let us say that the fractional-reserve is 1/5, meaning that the banks must keep 1/5 or 20% of its deposits on hand as a reserve, allowing themselves to loan out the other 80% of the deposited money. This means that the original $1,000 issued by the government will be expanded 5 times by the banks to produce a total money supply in the economy of $5,000.

Now, the government, in an attempt to stimulate the economy, decides to issue an additional $100, bringing its total issue into the economy to $1,100. The government plans to have its additional $100 expanded by the banks by a factor of 5, increasing the money supply by $500, for a total money supply of $5,500 – this is inflation.

However, the banks are wise to their government’s inflationary intentions and, just like the rest of us, begin to put their money into inflationary hedges, things that will not become less valuable if the government succeeds in making the dollar less valuable. Why have their money tied up in loans that are basically cash that cannot be touched for the term of the loan? By the time that the loan is repaid, the money is diluted by the government’s stimulation. The banks, as a way of not losing their shirts in the impending inflation, put their money into gold or otherwise act as we would all do to avoid being victims of inflation. The result of the banks’ adaptations to the government’s inflationary intentions is to reduce the volume of their credit. Although the law may only require them to reserve 1/5 of the money deposited in their safes, their financial strategies cause them to keep what Murray Rothbard referred to as “excess reserves.”

Returning to our model, let us say that the average bank in our little economy, in reaction to its government inflationary behavior, decides to keep 1/4 of its deposits in reserve, even though it is required to keep only 1/5. This would mean that the “multiplier” that determines the total money supply from the government issuances would be 4 rather than 5 (where R = 1/4, 1/R = 4). Since the government has issued a total of $1,100 into the economy, the total money supply after the banks have performed their credit expansion, would be only 4 times the original $1,100 or $4,400. In other words, an economy that had a money supply of $5,000 now has a money supply of $4,400 – it has been deflated by $600, resulting in further unemployment and a level of misery that would not have been necessary if the recession could have been allowed to run its natural course.

Recessions are the result of banks being able to expand and contract the money supply through fractional-reserve banking and the government cannot do anything to prevent this from happening. As long as we have fractional-reserve banking, there will be cycles of booms and busts and unfortunately, government intervention will only prolong and deepen the misery of the busts.

Thursday, May 21, 2009

Our Money is Not Real

Economic depressions are all the result of one single phenomenon – government sponsored fraud. If we eliminate the monetary fraud that empowers our politicians, we will have a stable economy that provides growth and full employment without the need for manipulative political institutions like the Federal Reserve. How the government, through its enabling of monetary fraud, causes economic downturns can be explained simply in the following few short paragraphs.

The marketplace, when it is not disturbed by government intervention, is an adaptive system that is self-correcting, eliminating the possibility of long-term downturns. Supply always changes to meet demand as producers change their prices and offerings to meet consumer needs. Massive unemployment is avoided because workers, like other producers, must occasionally change their services and their rates to meet the true sovereign of the market – the consumer.

Large adjustments in consumer demands that are pervasive across the economy are the result of an unstable monetary policy that causes surpluses and shortages of money. These monetary surpluses (known as inflation) and their corresponding shortages (known as deflation) cannot occur if the economy’s money is real. If money is real, its existence remains relatively constant through time without inflation or deflation. On the other hand, if it grows with our “irrational exuberance” and shrinks as our consumer confidence shrinks, it is not real and its volatility is caused by its fraudulent foundation.

How has our government enabled a form of money that is essentially fraudulent, causing depressions and credit meltdowns? To answer this question, we need to first recognize the vaporous quality of our money. The vast majority of our money has no physical existence at all. It is not backed by gold, green paper, or anything else. We can claim to have a thousand dollars in the bank simply because the bank says we can. Our money, known among economists as “fiat” money, is just a recorded number that our bank is required to keep accurate track of. Fiat money exists for no other reason than the right authorities say it does and this nebulous nature of our money is, as we will see, the reason why it can mysteriously come and go from our economy.

To understand fiat money we have to understand that fiat money is produced by our banks; not by the treasury department, the mint, or some other government organization. It is produced as if it was counterfeit currency, by private companies that actually increase their profits by making more of it through a practice that is essentially fraudulent. Banks become profitable businesses by producing as much fiat money as they can. To see how this is done, let us take three simple examples of a bank issuing credit:

1. The owner of the bank loans out $1,000 of his own money. In this case, the borrower has $1,000 more to spend, but the banker has $1,000 less, so the total effect of the transaction does not inflate or deflate the economy. This was the original form of credit but it is now almost nonexistent.

2.The owner of the bank loans out $1,000 that he has borrowed from his customers. He has given the loaning customer a $1,000 CD and he has given the borrower $1,000 as a loan. The total effect on the economy is again innocent. The borrower has $1,000 more to spend for the period of the loan, let us say two years, but the CD holder, who cannot claim his money for the two year period of his CD, has $1,000 less to spend. Again, there is no inflation or deflation. This form of credit, however, is minor and not important for the subject of this post.

3. The owner of the bank accepts $1,000 from a depositor into a checking account. He promises, with the government’s help, to keep the money safe, however, in truth, he actually loans the $1,000 out to a borrower (the government actually requires him to keep a small token of the checking out in a "fractional reserve," but the amount is insignificant and is ignored here for simplicity sake). There are now two people who are walking around claiming to have the original $1,000, the depositor, with his check book, and the borrower. The original $1,000 has turned into $2,000 in the economy’s money supply. This is called inflation.

The vaporous quality of our money is caused by the loaning out of our deposited money. Loaning out money that the depositor has a right to immediately demand is the source of the fiat currency that represents most of the money in our economy. When there are lots of borrowers with “irrational exuberance,” our economy inflates and when there are foreclosures and fewer borrowers we have deflation and rising unemployment as employers run out of the cash needed to make payrolls. Our government’s endorsement of the duplicating of depositors’ money through “fractional reserve” banking is the source of all monetary instability.

But fractional reserve banking is not only the source of our vaporous and unstable money supply, it is essentially fraudulent. If the banker is promising to keep the depositor’s money in safekeeping while loaning it to borrowers, his promise is made under false pretenses. On the other hand, if the depositor is making the claim that he actually has the money in a safe place while it has gone to a borrower, he is, perhaps unwittingly, making a false claim – his claimed money is really unavailable to him.

Once the government begins to enable this fraudulent money juggling, it either has to have the courage and integrity to fix the problem or it has to hide the problem through a series of techniques that protect the local banks from getting caught appropriating their depositors’ money. This is precisely the reason why politicians created the Federal Reserve System in 1913. Through a central bank, any local bank that ran short of money could be protected by the central bank. This plan, of course, failed in the Great Depression when the number of local banks with shortfalls became too great. Now the government had to take another step to cover its mistake, creating the FDIC which insured depositors even in periods of massive shortfalls. The FDIC, of course, only works because now the bank failures are covered directly by the taxpayer (the ultimate but involuntary insurers). Once the government begins to correct its distortions of the marketplace it needs to cover its ineptitude with even greater market distortions.

The only regulation that is needed to protect bank deposits is the enforcement of the law against fraud. If a bank promises to keep your money in a safe place and then is caught using it for another purpose, the officers of the bank are guilty of fraud and should go to jail. Enforcing this simple regulation would eliminate the need for the Federal Reserve System and the FDIC and would allow our economy to be based upon money that is real.