Monday, November 2, 2009

Mother of all Carry Trades Faces an Inevitable Bust

Articles on this blog are intended to introduce the reader to the nature and shortcomings of our financial system and ways to change it to free us from debt slavery

Posted: Sun, 01 Nov 2009 21:22:33 -0600
From the FT: By Nouriel Roubini

Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable.

This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher.
But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.
So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.

People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.

Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage- backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets – the VAR again looks low.

So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.

The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.

Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.

This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.

The writer is a professor at New York University’s Stern School of Business and chairman of Roubini Global Economics

Wednesday, August 26, 2009

Alberta Social Credit Platform In The Early WWII Years

In order to comfortably read the text in this flyer, please click on the photos below

The flyer from the early war years, reproduced below, gives a snapshot of the "Alberta Experiment" during its heyday and provides an interesting view of the issues of the day. The flyer was kindly provided by an elderly farm couple in West Central Alberta

Saturday, August 15, 2009

Portrait Of A Reformer - Social Credit Founder Clifford Hugh Douglas

Articles on this blog are intended to introduce the reader to the nature and shortcomings of our financial system and ways to change it to free us from debt slavery

The following notes are taken from Major Clifford Hugh Douglas’s book Social Credit (originally published in 1924), Douglas Centenary edition, an Institute of Economic Democracy publication, 1979.
IBSN: 0-920392-26-1
Library of Congress Catalogue Card No. 66-26837

About the author . . . .

The late Clifford Hugh Douglas, M.I.Mech.E., M.I.E.E., consulting engineer, economist, author and founder of the Social Credit movement, was born in 1879 and died in 1952. Among other posts which he had held in his earlier years were those of engineer with the Canadian General Electric Company, Peterborough, Canada, Assistant Engineer, Lachine Rapids Hydraulic Construction, Deputy Chief Electrical Engineer, Buenos Airies and Pacific Railway, Chief Engineer and Manager in India, British Westinghouse Company, Assistant Superintendent, Royal Aircraft Factory, Farnborough (England). During the First World War he was a Major in the Royal Flying Corps and later in the R.A.F. (Reserve).

After retiring from his engineering career, he and his wife ran a small yacht- building yard on Southampton Water for several years. The combination of beauty with functional efficiency in a successfully designed racing yacht had a special appeal for him. When he lived in an old water mill in Hampshire he used the waterwheel to turn a dynamo which lit and warmed the house as well as providing power for lathes and other tools. Later, when he moved to Scotland, many of his friends and followers remember helping to build his small hydroelectric powerhouse, sited on the local burn which ran through his land. Since decentralization of economic power was of the essence of his teaching, it should be put on record that he practiced what he preached.

One of his most interesting jobs, just before the 1914 war, was that of conducting preliminary experimental work and preparing plans and specifications for the electrical work on the Post Office Tube in London, with later supervision of the installation of plant in what was to be one of the earliest examples of complete automation in the history of engineering. While there were no physical difficulties about the work, he used to get orders from time to time to slow it up and pay off the men. When the War came however, he noticed that there was no longer any difficulty about getting money for anything the government wanted.

It appears that he was sent to Farnborough 1916 to sort out ‘a certain amount of muddle’ in the Aircraft Factory’s accounts, so that he had to go very carefully into the costing. This he did by introducing what were then known as ‘tabulating machines’ – an approach which anticipated the much later use of computers, and which drew his attention to the much faster rate at which the factory was generating costs as compared with the rate at which it was distributing incomes in the form of wages and salaries. Could this be true of every factory or commercial business?

Douglas then collected information from over 100 large businesses in Great Britain, and found that, in every case except in businesses headed for bankruptcy, the total costs always exceeded the sums paid out in wages, salaries and dividends. It followed that only a part of the final product could be distributed through the incomes dispersed by its production, and, moreover, a diminishing part as industrial processes lengthened and became more complex, and increased the ratio of overheads to current wages. Unless this the defect in monetary bookkeeping were corrected (which in his view was perfectly practicable), the distribution of the remainder must depend increasingly on work in progress on future products (whether wanted or not), financed by loan credit, export credits, sales below cost leading to bankruptcies and centralization of industrial power, or by consumer borrowing. The result must be predictably disastrous – in fact, the modern dilemma between mass poverty through unemployment and growing inflation, debt and monopoly, with waste of human effort and the earth’s resources to maintain ‘full employment’, requiring continuous economic ‘growth’ and economic warfare between nations leading towards military war.

This original engineer’s approach, which regarded the monetary system much as Douglas, a former railway engineer, had regarded the ticket system, as a mere book-keeping convenience for the efficient distribution of the product, was completely alien and unacceptable to the economic theorists of the day. Only one Professor of Economics (Professor Irvine of Sydney, Australia) expressed agreement with it, and he resigned his position shortly afterwards. This general condemnation by the economists was, however, along two different and contradictory lines, viz., 1. That the cost-income gap was an illusion due to Douglas’s failure to realize that the costs all represented sums paid out at a previous date as wages, salaries, etc. – ignoring the time factor which was the essence of his analysis; and, 2. that it was, on the contrary, a glimpse of the obvious, of no significance whatever, since this was the immutable way in which the monetary and economic system must work for the stimulation of new production and maintenance of the level of employment – i.e., ignoring Douglas’s radically different objective of production for the consumers’ use and not for ‘employment’ or other monetary objectives.

When the Great Depression of the 1930’s grimly confirmed Douglas’s diagnosis and gave him a worldwide reputation and following, his critics explained that he had mistaken a temporary lapse for a permanent defect in the monetary system; but subsequent events have, by now, so continuously fulfilled his predictions that this criticism is no longer credible. Despite rejection by the Economic Establishment of the day, Douglas was called upon to give evidence before the Canadian Banking Inquiry in 1923 and the Macmillan Committee in 1930, and undertook several world tours in which he addressed many gatherings, especially in Canada, Australia and New Zealand, and also at the World Engineering Congress in Tokyo in 1929. In 1935 he gave an important address before the King of Norway and the British Minister at the Oslo Merchants Club, and in the same year he was appointed Chief Reconstruction Adviser to the ‘United Farmers’ Government of the Province of Alberta, Canada, which later in the year elected the first Government to bear the title ‘Social Credit’. The Canadian Federal Government, however, frustrated all attempts to implement Douglas’s advice by disallowing the legislation, some of which was passed, and disallowed, twice; after which although the Party remained in power for over 30 years, it progressively abandoned the principles on which it was first elected. It should be placed on historical record, as a precedent, that two provincial ‘dividends’ of little more than token value, were nevertheless paid at one period to the citizens of the Province, and that, while still acting under the advice of Douglas’s representative, the Province paid its way without further borrowing, and drastically reduced the Provincial debt.

This diversion of Douglas’s ideas into the dead-end of Party politics has received far more publicity than the original and experimental approach to politics which is signposted in his later speeches and writings from 1934 onwards, notably in his five major speeches in England: The Nature of Democracy, The Tragedy of Human Effort, The Approach to Reality, The Policy of a Philosophy, and Realistic Constitutionalism. In 1934 a Social Credit Secretariat was formed under his Chairmanship, which started an Electoral Campaign involving the use of the vote for purposes desired by the electors rather than by Parliament or the Political Parties. This was followed by a highly successful Local Objectives Campaign along similar non-party lines, and a Lower Rates and Assessments Campaign which saved the British taxpayers many millions of pounds without loss of services, by reducing loan charges. The Second World War put an end to these activities on an organized national scale, and dispersed them, with the Social Credit Movement, into a decentralized force, better adapted to the present crisis of World centralization.

In the final phase of his life, roughly from 1939 to his death in 1952 Douglas consolidated his ideas in depth, contrasting very clearly the philosophy which underlies them with that which activates the Monopoly of Credit. Although the best known of them, which has already exercised considerable influence in the World, lie in the economic sphere: the concepts of real credit, the increment of association and the cultural inheritance, and the proposals of the National Dividend and the Just or Compensated price – his political ideas, though as yet little known, are if anything of greater importance. They were always worked out with a characteristic practicality, taking account of the feedback from the course of events. No one else has thrown so much light on the true nature of democracy, as distinct from the numerical product of the ballot box; on the need for decentralized control of policy and hierarchical control administration; on the freedom to choose one thing at a time, on the right to contract out, on the Voters’ Policy and the Voters’ Veto. In his last address given in London to the Constitutional Research Association in 1947, he put forward his last proposal for the rehabilitation of democracy: the Responsible Vote, in which the financial consequences of his open electoral choice would be, for a time, differentially paid for by the voter in proportion to his income – a literally revolutionary suggestion which demands an inversion of current ideas about anonymous, irresponsible, numerical voting.

Hugh Gaitskell, a former Leader of the Labour Party once sarcastically described Douglas as a ‘religious rather than a scientific reformer’. Perhaps he was more right than he knew! It may be that Douglas’s thinking on the subjects of philosophy, policy and religion, and the special meaning he gave to those words, will turn out to be his most valuable contribution to the restoring of the link between religious belief and principles which govern society. In his view, a ‘philosophy’, i.e., a conception of the universe, always expresses itself as a ‘policy' – a distinctive long-term course of action directed towards ends determined by that ‘philosophy’. ‘Religion’ (from the Latin religare, to bind back) is not just a set of beliefs such as are expressed in the Christian creeds (which constitute a ‘philosophy’) but is precisely the ‘binding back’ of these ideas to the reality of our lives, not only individually, but in the political and economic relationships of our society.

The policies of centralization and monopoly now being imposed upon the World through the closely related agencies of Finance-Capitalism and Marxist Socialism derive from a ‘philosophy’ fundamentally different from, and opposed to, that of Trinitarian Christianity, which was, however imperfectly, expressed in our Constitution, our Common Law, and the progress towards personal freedom which had been made, especially, in Britain and the Commonwealth. At the time Douglas first put forward his ideas and proposals for carrying forward this traditional policy to its next stage, its Christian basis could be taken for granted as mere ‘common sense’. Now, that can no longer be taken for granted and it has become necessary consciously to distinguish the policies at work in our society, and to relate them to the fundamental beliefs which gave rise to them. In this sense, therefore, ‘Social Credit’ is the social policy of a Christian ‘philosophy’, and before the end of his life, its founder made this explicit, rather than, as in the beginnings, implicit.

Thursday, July 9, 2009

California, Take Heart!

Articles on this blog are intended to introduce the reader to the nature and shortcomings of our financial system and ways to change it to free us from debt slavery

California Dreamin': How the State Can Beat Its Budget Woes
By Ellen Brown

As goes California," says the adage, "so goes the nation." All eyes are therefore on the Golden State as it attempts to solve its $26 billion budget deficit. The world's eighth largest economy is not going quietly into that pit of debt and devastation that has devoured Third World countries whole. The State's voters have drawn a line in the sand against further tax hikes, while Democratic leaders have drawn a line at further cuts in services or selloff of public assets. State legislators are deadlocked, caught between the rock of tax ceilings and the hard place of debt limits.

"Expect the best and accept nothing less," says another adage that typifies the attitude sometimes called "California dreaming." You create your own reality. Instead of trying to prop up an old model that has failed, you can dream up a new one. If anyone can come up with an original solution to the problem, Californians should be able to. But what? While waiting for developments, Governor Arnold Schwarzenegger has started paying the State's bills with IOUs ("I Owe You"s evidencing debt, technically called "registered warrants").

Hmm . . . Pay the bills with IOUs. Not a bad idea! That was, in fact, the original innovation that got the American colonists out of their financial straits back in the 18th century, when they lacked the silver and gold used in the Old World for conducting trade. Money, after all, was just a medium of exchange, an acknowledgment of goods and services delivered or a debt owed. The notion that the government could pay in paper receipts was first hit on by the governor of the province of Massachusetts in 1691, when he needed money to fund a local war. The use of a paper currency had been suggested in an anonymous British pamphlet in 1650, but the proposal was modeled on the receipts issued by London goldsmiths and silversmiths for the precious metals left in their vaults for safekeeping. The problem for the colonies was that they were short of silver and gold. The Massachusetts Assembly therefore proposed a different kind of paper money, a "bill of credit" representing the government's "bond" or IOU. The paper money of Massachusetts was backed only by the "full faith and credit" of the government.

Other colonies followed suit with their own issues of paper money. Some were considered government IOUs, redeemable later in "hard" currency (silver or gold). Others were issued as "legal tender" in themselves. They were "as good as gold" in trade, without bearing debt or an obligation to redeem the notes in some other form of money later. The new paper money not only made the colonies independent of the British bankers and their gold but actually allowed the colonists to finance their local government without taxing the people. Colonial assemblies discovered that provincial loan offices could generate a steady stream of revenue in the form of interest income by taking on the lending functions of banks.

The same solution was employed in other countries later. When Argentina's government workers were faced with massive layoffs, their unions persuaded six state governments to pay them instead with state bonds or IOUs in small denominations. The IOUs could then be used to pay for state services and taxes, and everyone in the local economy accepted them in trade.

There's Just One Problem . . .

Why couldn't California do the same thing? The problem with calling its IOUs "legal tender" today is that the ruse violates the U.S. Constitution. Article I, Section 10, says, "No State shall . . . coin money [or] emit bills of credit." The Cornell University Law School Annotated Constitution gives this definition:

Within the sense of the Constitution, bills of credit signify a paper medium of exchange, intended to circulate between individuals, and between the Government and individuals, for the ordinary purposes of society.
U.S. Supreme Court cases are cited from the 1830s, in which "interest bearing certificates, in denominations not exceeding ten dollars, which were issued by loan offices established by the State of Missouri and made receivable in payment of taxes or other moneys due to the State, and in payment of the fees and salaries of state officers, were held to be bills of credit whose issuance was banned by this section."

That all seems pretty clear cut, until you read a bit further. Article I, Section 10, also says that no State shall "make any Thing but gold and silver Coin a Tender in Payment of Debts." When was the last time any State paid its bills only in gold and silver coin? The States could argue that the Constitution needs to be updated.

They could make some other compelling arguments. The States agreed to give up their right to issue their own currencies because they delegated that power to Congress. Article I, Section 8, enumerates among the powers given to Congress, "To coin Money [and] regulate the Value thereof." Scholars continue to argue about the meaning of "to coin money," but the Constitution clearly gives no entity except Congress the power to create money and regulate its value, and Congress failed to properly husband that authority. It issued coins, but it allowed privately-owned banks to issue "banknotes," which soon made up the bulk of the nation's money supply. Bankers, not Congress, thus "regulated the value" of the currency, through the laws of supply and demand: the more notes they created, the smaller the value of each. In 1913, Congress went so far as to allow a privately-owned central bank called the Federal Reserve to issue its own Federal Reserve Notes and call them the exclusive national paper currency. These notes were then lent to the U.S. government, at interest.

Today, however, Federal Reserve Notes compose only about 3% of the money supply (M3). The other 97% is issued by private banks in the form of loans. "Bank credit" is created simply by entering numbers into the accounts of borrowers, as many authorities have attested. One of the most clear statements of this process came from Graham Towers, Governor of the Bank of Canada from 1935 to 1955, who acknowledged:

Banks create money. That is what they are for. . . . The manufacturing process to make money consists of making an entry in a book. That is all. . . . Each and every time a Bank makes a loan . . . new Bank credit is created -- brand new money.
Congress has not only reneged on its agreement to create the national money supply, but it has refused to front the funds to bail out California from its relatively modest $26 billion budget shortfall. Californians are justifiably upset, since Congress hardly batted an eye before earmarking some $700 billion in bailout money for the private banking system, and the Federal Reserve has committed trillions more for that dubious purpose. Nearly ten times the sum needed by California was allotted to bailing out AIG, a private insurance company; and half the sum needed by California went to pay off the gambling debts of AIG to Goldman Sachs, a single bank. California underwrites a substantial portion of the federal government's budget, sending a dollar in tax revenue for every 80 cents it gets back. Yet the federal government has even rejected California's request for a loan guarantee, which could have saved the State hundreds of millions of dollars in interest. The clear message is, "You're on your own."

Creative Problem Solving

The situation looks pretty dire, but it may just need some thinking outside the box. The law does not allow the States to issue "bills of credit," but it does allow them to create another form of money called "checkbook" money. All a State has to do is to form its own bank. Quoting again from the Cornell University Law School Annotated Constitution:

Bills issued by state banks are not bills of credit; it is immaterial that the State is the sole stockholder of the bank, that the officers of the bank were elected by the state legislature, or that the capital of the bank was raised by the sale of state bonds.

If private banks can create credit on their books, so can the world's eighth largest economy. Indeed, there is longstanding precedent for this approach. The State of North Dakota has owned its own bank for nearly a century. North Dakota is one of only two States (along with Montana) that are not currently facing budget shortfalls. North Dakota has beaten the Wall Street credit freeze by generating its own credit. By law, ever since 1919 the State's revenues have been deposited in its own bank, the Bank of North Dakota (BND). Using the "fractional reserve" lending scheme open to all banks, these deposits are then available to be used as the "reserves" for creating many times their face value in loans. Other banks in the State do not see the BND as a threat, because it partners with them and backstops them, serving as a sort of central bank for North Dakota. BND's loans are not insured by the Federal Deposit Insurance Corporation (FDIC) but are guaranteed by the State.

If California followed suit, it would not need to meet the FDIC's capital requirements but could designate state-owned property (parks, buildings and so forth) as its capital base. Applying the "multiplier effect" by which capital is lent and relent many times over, this base could then generate hundreds of billions of dollars in "credit." The State could deposit its revenues in the State bank and pay its payroll through it, generating an even larger deposit base for making new loans. Enough credit could be generated to allow the State not only to meet its short-term budget needs but to buy back its outstanding bonds (or debt). Bond interest and redemption costs on California's General Fund for the current year are estimated at nearly $5 billion -- about 20% of the budget shortfall. All of that money could be saved in interest, since the State would be paying interest to itself.

The State could do more than just chase the wolf from its door. It could generate enough credit to engage in the sort of economic "stimulus" being undertaken by the federal government. It could create jobs for the 11.5% of the State's population that are currently unemployed, augmenting the tax base and supplying the incomes necessary to prop up the languishing housing market. Loans for income-producing projects (transportation, energy, housing) could be repaid with the profits generated by the funded projects. And if some of the newly-issued loans were not paid back, they could simply be refinanced. The federal government has been rolling over its loans ever since 1835, the last time the federal debt was actually paid off (under Andrew Jackson).

In boom times, this approach could result in unwanted inflation. But today the economy is suffering from a serious shortage of money, because virtually all of our money comes from bank loans, and bank lending has dried up. Since neither the federal government nor the Federal Reserve has stepped in to fill the void, the States must do it themselves; and like the 18th century colonial governments, they can do it by taking on the lending functions of banks.

California's taxpayers and legislators are doing the right thing digging in their heels and drawing the line at further austerity measures. California is being watched not only by the nation but by the world. We the people did not precipitate this credit crisis; the banks did. We should not have to pay for the damage with increased taxes or decreased services or our public parks and parking meters. Like the American colonists, we can replace the old model with something better. If California legislators act quickly, they can have a State-owned bank up and running before their 45-day IOUs run out. With today's new online banking possibilities, the State would not even need to invest in a "brick and mortar" building. The whole business could be done by computer. Weary legislators trying to agree on a budget could all shake hands and go home, without budging an inch from their respective platforms. They could have it all, and so could we the people.

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Tuesday, June 30, 2009

Debt Deflation in America‏

Articles on this blog are intended to introduce the reader to the nature and shortcomings of our financial system and ways to change it to free us from debt slavery

From: Global Research E-Newsletter (
Sent: June 30, 2009 4:10:35 AM
Debt Deflation in America
What the Jump in the U.S. Savings Rate Really Means

By Michael Hudson

URL of this article:

Global Research, June 29, 2009

Happy-face media reporting of economic news is providing the usual upbeat spin on Friday's debt-deflation statistics. The Commerce Department's National Income and Product Accounts (NIPA) for May show that U.S. “savings” are now absorbing 6.9 percent of income.

I put the word “savings” in quotation marks because this 6.9% is not what most people think of as savings. It is not money in the bank to draw out on the “rainy day” when one is laid off as unemployment rates rise. The statistic means that 6.9% of national income is being earmarked to pay down debt – the highest saving rate in 15 years, up from actually negative rates (living on borrowed credit) just a few years ago. The only way in which these savings are “money in the bank” is that they are being paid by consumers to their banks and credit card companies.

Income paid to reduce debt is not available for spending on goods and services. It therefore shrinks the economy, aggravating the depression. So why is the jump in “saving” good news?

It certainly is a good idea for consumers to get out of debt. But the media are treating this diversion of income as if it were a sign of confidence that the recession may be ending and Mr. Obama's “stimulus” plan working. The Wall Street Journal reported that Social Security recipients of one-time government payments “seem unwilling to spend right away," 1 while The New York Times wrote that “many people were putting that money away instead of spending it.”2 It is as if people can afford to save more.

The reality is that most consumers have little real choice but to pay. Unable to borrow more as banks cut back credit lines, their “choice” is either to pay their mortgage and credit card bill each month, or lose their homes and see their credit ratings slashed, pushing up penalty interest rates near 20%! To avoid this fate, families are shifting to cheaper (and less nutritious) foods, eating out less (or at fast food restaurants), and cutting back vacation spending. It therefore seems contradictory to applaud these “saving” (that is, debt-repayment) statistics as an indication that the economy may emerge from depression in the next few months. While unemployment approaches the 10% rate and new layoffs are being announced every week, isn't the Obama administration taking a big risk in telling voters that its stimulus plan is working? What will people think this winter when markets continue to shrink? How thick is Mr. Obama's Teflon?

We are living in the wreckage of the Greenspan bubble

As recently as two years ago consumers were buying so many goods on credit that the domestic savings rate was zero. (Financing the U.S. Government's budget deficit with foreign central bank recycling of the dollar's balance-of-payments deficit actually produced a negative 2% savings rate.) During these Bubble Years savings by the wealthiest 10% of the population found their counterpart in the debt that the bottom 90% were running up. In effect, the wealthy were lending their surplus revenue to an increasingly indebted economy at large.

Today, homeowners no longer can re-finance their mortgages and compensate for their wage squeeze by borrowing against rising prices for their homes. Payback time has arrived – paying back bank loans, whose volume has been augmented to include accrued interest charges and penalties. New bank lending has hit a wall as banks are limiting their activity to raking in amortization and interest on existing mortgages, credit cards and personal loans.

Many families are able to remain financially afloat by running down their savings and cutting back their spending to try and avoid bankruptcy. This diversion of income to pay creditors explains why retail sales figures, auto sales and other commercial statistics are plunging vertically downward in almost a straight line, while unemployment rates soar toward the 10% level. The ability of most people to spend at past rates has hit a wall. The same income cannot be used for two purposes. It cannot be used to pay down debt and also for spending on goods and services. Something must give. So more stores and shopping malls are becoming vacant each month. And unlike homeowners, absentee property investors have little compunction about walking away from negative equity situations – owing creditors more than the property is worth.

Over two-thirds of the U.S. population are homeowners, and real estate economists estimate that about a quarter of U.S. homes are now in a state of negative equity as market prices plunges below the mortgages attached to them. This is the condition in which Citigroup and AIG found themselves last year, along with many other Wall Street institutions. But whereas the government absorbed their losses “to get the economy moving again” (or at least to help Congress's major campaign contributors to recover), personal debtors are in no such favored position. Their designated role is to help make the banks whole by paying off the debts they have been running up in an attempt to maintain living standards that their take-home pay no longer is supporting.

Banks for their part are slashing credit-card debt limits and jacking up interest and penalty charges. (I see little chance that Congress will approve the Consumer Financial Products Agency that Mr. Obama promoted as a flashy balloon for his recent bank giveaway program. The agency is to be dreamed about, not enacted.) The problem is that default rates are rising rapidly. This has prompted many banks to strike deals with their most overstretched customers to settle outstanding balances for as little as half the face amount (much of which is accrued interest and penalties, to be sure). Banks are now competing not to gain customers but to shed them. The plan is to offer steep enough payment discounts to prompt bad risks to settle by sticking rival banks with ultimate default when they finally give up their struggle to maintain solvency. (The idea is that strapped debtors will max out on one bank's card to pay off another bank at half-price.)

The trillions of dollars that the Bush and Obama administration have given away to Wall Street would have been enough to buy a great bulk of the mortgages now in default – mortgages beyond the ability of many debtors to pay in the first place. The government could have enacted a Clean Slate for these debtors – financed by re-introducing progressive taxation, restoring the full capital gains tax to the same rate as that levied on earned income (wages and profits), and closing the tax loopholes that effectively free finance, insurance and real estate (FIRE) sector from income taxation. Instead, the government has made Wall Street virtually tax exempt, and swapped Treasury bonds for trillions of dollars of junk mortgages and bad debts. The “real” economy's growth prospects are being sacrificed in an attempt to carry its financial overhead.

Banks and credit-card companies are girding for economic shrinkage. It was in anticipation of this state of affairs, after all, that they pushed so hard from 1998 onward to make what finally became the 2005 bankruptcy laws so pro-creditor, so cruel to debtors by making personal bankruptcy an economic and legal hell.

It is to avoid this hell that families are cutting their spending so as to keep current on their debts, against all odds that they can avoid default in today's shrinking economy.

Working off debt = “saving,” but not in liquid form

People are putting more money away, but not into savings accounts. They are indeed putting it into banks, but in the form of paying down debt. To accountants looking at balance sheets, savings represent the increase in net worth. In times past this was indeed the result mainly of a buildup of liquid funds. But today's money being saved is not available for spending. It merely reduces the debt burden being carried by individuals. Unlike Citibank, AIG and other Wall Street institutions, they are not having their debts conveniently wiped off the books. The government is not nice enough to buy back their investments that had lost up to half their value in the past year. Such bailouts are for creditors and money managers, not their debtors.

The story that the media should be telling is how today's post-bubble economy has turned the concept of saving on its head. The accounting concept underlying balance sheets is that a negation of a negation is positive. Paying down debt liabilities is counted as “saving” because one owes less.

This is not what people expected a half-century ago. Economists wrote about how technology would raise productivity levels, people would be living in near utopian conditions by the time the year 2000 arrived. They expected a life of leisure and prosperity. Needless to say, this is far from materializing. The textbooks need to be rewritten – and in fact, are being rewritten.3

Keynesian economics turned inside-out

Most individuals and companies emerged from World War II in 1945 nearly debt-free, and with progressive income taxes. Economists anticipated – indeed, even feared – that rising incomes would lead to higher saving rates. The most influential view was that of John Maynard Keynes. Addressing the problems of the Great Depression in 1936, his General Theory of Employment, Interest, and Money warned that people would save relatively more as their incomes rose. Spending on consumer goods would tail off, slowing the growth of markets, and hence new investment and employment.

This view of the saving function – the propensity to save out of wages and profits –viewed saving as breaking the circular flow of payments between producers and consumers. The main cloud on the horizon, Keynesians worried, was that people would be so prosperous that they would not spend their money. The indicated policy to deter under-consumption was for economies to indulge in more leisure and more equitable income distribution.

The modern dynamics of saving – and the increasingly top-heavy indebtedness in which savings are invested – are quite different from (and worse than) what Keynes explained. Most financial savings are lent out, not plowed into tangible capital formation and industry. Most new investment in tangible capital goods and buildings comes from retained business earnings, not from savings that pass through financial intermediaries. Under these conditions, higher personal saving rates are reflected in higher indebtedness. That is why the saving rate has fallen to a zero or “wash” level. A rising proportion of savings find their counterpart more in other peoples' debts rather than being used to finance new direct investment.

Each business recovery since World War II has started with a higher debt ratio. Saving is indeed interfering with consumption, but it is not the result of rising incomes and prosperity. A rising savings rate merely reflects the degree to which the economy is working off its debt overhead. It is “saving” in the form of debt repayment in a shrinking economy. The result is financial dystopia, not the technological utopia that seemed so attainable back in 1945, just sixty-five years ago. Instead of a consumer-friendly leisure economy, we have debt peonage.

To get an idea of how oppressive the debt burden really is, I should note that the 6.9% savings rate does not even reflect the 16% of the economy that the NIPA report for interest payments to carry this debt, or the penalty fees that now yield as much as interest yields to credit-card companies – or the trillions of dollars of government bailouts to try and keep this unsustainable system afloat. How an economy can hope to compete in global markets as an industrial producer with so high a financial overhead factored into the cost of living and doing business must remain for a future article to address.


1 Kelly Evans, “Americans Save More, Amid Rising Confidence,” Wall Street Journal, June 27, 2009.

2 Jack Healy, “As Incomes Rebound, Saving Hits Highest Rate in 15 Years,” The New York Times, June 27, 2009.

3 Four years ago at a post-Keynesian “heterodox economics” conference at the University of Missouri at Kansas City (on whose faculty I have been for some years now), I outlined the shift from over-saving to debt deflation. Michael Hudson, “Saving, Asset-Price Inflation, and Debt-Induced Deflation,” in L. Randall Wray and Matthew Forstater, eds., Money, Financial Instability and Stabilization Policy (Edward Elgar, 2006):104-24.

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Sunday, June 21, 2009


Articles on this blog are intended to introduce the reader to the nature and shortcomings of our financial system and ways to change it to free us from debt slavery

Banking time bombs

Samah El-Shahat, Al Jazeera's resident economist, will be writing a regular column analysing key elements that have contributed to the global financial downturn and its impact across the world.

The trickle-down effect don't work
As a development economist, I have seen many economics theories or so called 'magic bullets' for the world's ills come and go.
No, I am not that old, but economics, like fashion, has many theories that come and go and then make a come back retro style.

The problem is some of them have been largely discredited but they still make a return becaue they serve the interests of those with influence and power. So it has always been politically convenient to dress up self interest in intimidating and opaque economics jargon.

During the 1980s and 1990s, the World Bank and the IMF believed that something called the 'trickle down effect' could save the world's poor.
In rough terms, 'trickle down' means if you give the rich tax breaks and support their industries, the wealth they create will ultimately benefit poorer people.
That is, money, just like rain, will start trickling down to us all. A theory that never worked, and African and South American countries that were made to pursue it got poorer not richer, and the poorer of those countries ended up paying a very high price

John Kenneth Galbraith, another economist, calls this the horse and sparrow theory: "If you feed the horse enough oats, some will pass through to the road for the sparrows."

So how does this apply to today's banking crisis?

Well, it is very relevant because governments across the world, but particularly the US and British administrations, are solving the financial crisis with a top-down approach.
They are hoping if they shower rich bankers with money and use taxpayers' cash to underwrite their banks then, ultimately, some money will flow down to us.
Over optimistic William Cohan, a well-known American journalist, questioned this recently in the New York Times.
"Why is so much effort being put into propping up those at the top of the economic pyramid — the money-centre banks, the insurance companies, the hedge funds and so forth — when, during a period of deflation like the one we are in, any recovery will come only by restoring the confidence of the people down at the bottom of the pyramid."

But given that a lot of these banks are ZOMBIES - and by this I mean they are dead, but are walking among the living thanks to taxpayers' money.

I believe resting our economic futures on their resurrection is taking optimism a step too far. Look how much bad debt they have on their balance sheets.
Economists such as Ann Pettifor and John Kenneth Galbraith believe that the banks will use all the taxpayer money that comes their way to recapitalise themselves.
The banks will try to cover huge holes in their balance sheets due to the toxic debt they have. They should, instead, be using this money to start lending to us again - you know the real economy. This is what the banks are supposed to be doing.

Unemployment in the US is rising, fuelling fears more homes will be repossessed [AFP]

The 'trickle down' has been captured by the banks and this will continue slowing down our recovery, and I find that very frightening.

So how could this happen?

Governments are trying to find solutions to this problem that are dictated by the interests of the banking and financial sectors.

But when did the interests of the financial sector become the interest of the country?

Particularly when unemployment in America is estimated to go over ten per cent. Has anyone asked a person who is losing their home how they feel about this?

Simon Johnson, a former IMF chief economist, recently said: "Throughout the crisis, the government has taken extreme care not to upset the interests of the the financial institutions or to question the basic outlines of the system that got us here.

"In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks with no strings attached and no judicial review for his purchase decision.

"Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands, indeed that is the only way that buying toxic assets would have helped anything.

"Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved."

'Business as usual'

So I am still astonished that that governments are still hell-bent on maintaining the status quo, the business as usual approach that got us into this mess in the first place.

Has a single bank management been made to change despite being the source of the mess? Has a single bank been truly nationalised in the real sense of the word? Has any real clean audit of a bank happened? And please let's not bring up stress tests that were made to make sure everyone passes...

For every one of those questions the answer is a loud and resounding NO.

Some of the banks are now being allowed to payback some bailout money - banks such State Street and JP Morgan Chase. But they are being allowed to do so without revealing the extent of the toxic assets on their balance sheets.

"I fear these banks are walking time bombs... freed from any noose or hold the government had over them because they have paid back their bailout"

We are none the wiser than we were at the start of this crisis as to how truly 'insolvent' they are.

Yes, I hate to bring up that word but just because they are paying back some Treasury Asset Relief Program money doesn't make them healthy. Remember, they are using taxpayer money to pay the taxpayer back.

The Obama administration had a plan to get rid of these toxic assets called the Public Private Partnership Investment Partnership - the PPIP.

And even though the PPIP gave investors and Wall Street incredible inducements, and huge taxpayer subsidies to buy and sell these toxic assets, the banks did not play ball.

The plan was laid to rest last week, which is extraordinary because it was the central plank of the Obama administration's plan to rescue the banks.

I think this is disastrous. Not because I liked the PPIP, I thought it was grossly unfair and I agree with the economists Paul Krugman and Joseph Stiglitz when they said it transferred taxpayers money to the banks.

But at least the PPIP tried to deal with the toxic assets that got us into this mess in the first place.

Now I fear that these banks are walking time bombs, which are now walking away, freed from any noose or hold the government had over them because they have paid back their bailout.

And if we do not get an economic recovery soon, the toxic assets on the banks' balance sheets will detonate and bring us all down with them.

The banks are gambling on the green shoots of a miraculous economic recovery, which I think is delusional and shame on those in power for allowing them yet another chance to gamble with our economic futures.

Samah El-Shahat also presents Al Jazeera's People & Power programme.
The views expressed in this column are the author's own and do not necessarily reflect Al Jazeera editorial policy.

Source: Al Jazeera

Thursday, May 28, 2009

How To Start A Local Community Bank That Does Not Charge Interest

Articles on this blog are intended to introduce the reader to the nature and shortcomings of our financial system and ways to change it to free us from debt slavery. One way to do that is to start your own local bank. It is very simple and does not violate any laws.
A complete article on how to do this can be found on

Wednesday, May 6, 2009

Urgency of the American Monetary Act by Richard C. Cook

Articles on this blog are intended to introduce the reader to the nature and shortcomings of our financial system and ways to change it to free us from debt slavery
On Thursday, April 23, 2009, Stephen Zarlenga, director of the American Monetary Institute (AMI), delivered two briefings on Capitol Hill on the American Monetary Act that AMI drafted and that may be introduced as legislation during the current congressional session. This single measure has the potential of bringing together the tens of millions of people who have realized it’s our bank-run debt-based monetary system that lies at the center of the financial rot that is destroying our republic and its values.
Attending the briefings were congressional staffers and members of the public. Zarlenga was introduced by Congressman Dennis Kucinich (D-OH), who has spoken in favor of wholesale reform of the monetary system on the floor of the U.S. House of Representatives. Kucinich is also sponsor of H.R. 7260, the “Transparency in the Creation of Wealth Act of 2008.” This act would require the Federal Reserve to resume reporting on the quantity of M3 in the economy (mega-money accessible only to large financial institutions), along with several other economic indicators it now keeps to itself, such as total credit market debt and the holding of Federal Reserve notes by foreign interests.
Stephen Zarlenga is author of The Lost Science of Money (American Monetary Institute, 2002), a monumental 736-page book that shows how money has served socially beneficial purposes throughout history only when created by governments as an instrument of law and not as the private preserve of the rich.
Hugh Downs, an unusually well-informed media personality with a strong social conscience, said of The Lost Science of Money, that it “has some stunning historical vistas of the whole concept of media of exchange.” Renowned progressive economist Dr. Michael Hudson said, “The history of money is critical to understanding the greatest problem the third millennium will face. Stephen Zarlenga's Lost Science of Money provides the needed background for seeing the basic structural issues at work.”

Since Zarlenga published The Lost Science of Money, the American Monetary Institute has grown, with chapters in Boston, New York, Chicago, Iowa, Seattle, and other locations. He conducts an annual monetary reform conference at Roosevelt University in Chicago and has a busy travel and speaking schedule. He has addressed audiences at the U.S. Treasury Department in Washington, D.C., and the British House of Lords in London.
The American Monetary Act may be viewed and downloaded from the AMI website at The main thrust of the act is to replace the bank-centered debt-based monetary system with the direct creation of money by the federal government which would spend it into circulation as was done with the Greenbacks of the latter part of the 19th century.
The money would be spent on all types of legislated government requirements but would focus on infrastructure improvements, including education and health care. The act not only would create a new monetary supply denominated in U.S. Treasury notes, but would rebuild our job base which has been outsourced to other nations by the globalist corporations and big financial interests.
The critical role of the Greenbacks in U.S. history has been distorted and downplayed by the establishment interests that control the writing of history textbooks. The Greenbacks originated during the Civil War when the government printed and spent them to meet wartime needs. Contrary to mythology, the Greenbacks were not inflationary. They continued to serve as a key part of the nation’s monetary supply into the early 20th century. As late as 1900 they formed a third of the nation’s circulating currency, with coinage, along with gold and silver certificates, forming another third, and national bank notes the remainder.
Later the value of both the Greenbacks and metallic-based currency were destroyed by the inflation caused by the introduction of Federal Reserve Notes after the approval of the Federal Reserve System by Congress in 1913. From that point on, the creation of money in the U.S. became a monopoly of the private banking system. This led to the Great Depression when the banking system crashed the economy through its deflationary policies.
The nation recovered from the Depression through the New Deal and the adoption of Keynesian economic policies during and after World War II. But now, in the early years of the 21st Century, the financial system again has collapsed through the gigantic speculative bubbles of the last 30 years. The Bush-Obama bailouts that are costing taxpayers trillions of dollars are benefiting the financial controllers but are not doing anywhere near enough for the producing economy. Even though officials are starting to forecast an economic recovery, there is every indication it will be another “jobless” recovery like the one from 2002-2005.
The American Monetary Act would put a stop to the travesties of the bank-controlled monetary system that has wrecked what was once the world’s greatest industrial democracy. In addition to reintroducing the Greenbacks, the act would eliminate fractional reserve banking by requiring banks to borrow money from the U.S. Treasury to bring their cash reserves up to the level of their lending portfolio rather than allowing them to continue to create money “out of thin air.” The banks would no longer be able to create trillions of dollars of credit, backed by nothing, which they use to fuel the speculative equities, hedge fund, and derivative markets.
The act also contains a provision for a citizens’ dividend through direct payment of cash to individuals. While it does not authorize a dividend at the level Stephen Shafarman and I have proposed in our respective books, Peaceful, Positive Revolution and We Hold These Truths: The Hope of Monetary Reform, it is a major step in the right direction. In what I have called the "Cook Plan" I advocate a dividend of $12,000 a year per capita for adults who apply with the money, once spent, being used to capitalize a new network of community savings banks.
With the 2008-2009 collapse of the financial system, the deep recession we are now suffering through, and the injustice of the government’s bank bailouts currently being administered by Secretary of the Treasury Timothy Geithner, millions of people in the U.S. and around the world have had enough of government policies that enrich the financial oligarchy and destroy the livelihood of everyone else. The world today is headed for a dark age of debt-slavery and ruinous poverty for much of the world’s population, including working people in the U.S.
The only way a catastrophe can be averted is for mankind to wake up and demand the creation of a new monetary system where money and credit are treated as a public utility. This means that money and credit should serve the needs of the producing economy while assuring a decent living and sufficient income for everyone.
To reach this goal, it is counterproductive for people simply to complain about what is happening or support half-measures like the call to embrace a gold standard. Any attempt to impose a new gold standard would play into the hands of those who control the gold; i.e., the bankers. Creating a new gold standard appears to be the objective of movements like “End-the-Fed.”
The key is not whether money is backed by gold or any other commodity but whether it serves the needs of real people, allows the trade and productivity of the nation to move, restores our job base, and supports consumer purchasing power. The American Monetary Act would meet these objectives. With the financial disasters of the last two years, millions of people realize the system is rigged against them. Jobs and savings continue to disappear while debt and the power of the banking millionaires increase. The time for Congress to act is now.

Richard C. Cook is a former federal analyst who writes on public policy issues. His book “We Hold These Truths: the Hope of Monetary Reform” is now available at His website is

Sunday, April 26, 2009

Study Course in Social Credit By J.M. Hattersley

Articles on this blog are intended to introduce the reader to the nature and shortcomings of our financial system and ways to change it to free us from debt slavery

Lesson I - The Principles of Government

“SOCIAL CREDIT” means “the Credit of Society” - that is, the belief that human beings, working together in association, can gain for themselves the results they want to achieve.

Man is not a creature who can stand strongly when alone. In comparison with the rest of the animal kingdom, his body has few natural defences, either against the elements, or against his natural enemies. He cannot hunt his prey like the lion or the tiger. Physically he is a comparatively weak and late arrival in the order of living creatures.

Man, however, has become the most dominating of all living creatures on earth. This he has achieved through the power of association. Equipped with the gift of language, he is able to cooperate with his fellow men. Having discovered the secrets of reading and writing, the knowledge he has gained is not lost upon his death, he can acquire skill and learning from his fellow man who may have lived centuries before. He can add to this body of knowledge and pass a still greater heritage to those who come after him. By working with his fellow men, he has been able to secure protection for a group against common enemies. He has been able to devise and develop tools to aid him in his daily life – and borrow new skills and techniques from the inventions of others. He has been able to become a farmer instead of a nomadic hunter. He has learned to harness the forces of nature and bend them to his purpose. Every year sees new powers acquired by mankind – new abilities and new achievements to his credit. Every one of these comes from a single source. Man, by working in association with his fellow men, by building upon a heritage of culture laid down from the remotest past and still being added to today, has been able to become to a greater and greater degree the master of the Universe.

The Need for Government
Because of the great advantage that comes to men when they are able to cooperate with, and associate with their fellow men and have access to the store of knowledge and wealth accumulated in the past, societies of one sort or another have grown up in all parts of the globe.

The most fundamental and simple unit of human society is the family – a number of human beings linked by common ties of kindred. In time, the family expanded into the clan, and later still, groups of clans became associated in nations. The nation was a unit of peoples strong enough to give its members protection against their external enemies, and also secure to its members a particular territory. Each nation settled its own government, laws and customs, and protected its territory from invasion as well as it was able. At the present day, the territory of the world is divided into more than a hundred nations, and the whole of humankind is classified, with few exceptions, according to the nationality to which they belong.

As soon, however, as associations of human beings grew beyond the size of the family and clan, where natural parental authority could be expected to be adequate for the maintenance of law and order, then problems of government began. Primitive man had been so poor that his life was one of bare survival: his property was little more than his weapons, and his tent or cave. Once men were able, through the help they gave each other by working in association – through their “social credit” — to achieve for themselves an existence above bare survival, a new, important question arose. In what manner was this new wealth to be divided? What rights should each citizen have to the benefits that the community gave to all in common? What powers should the Government have over the person and property of individual citizens? The determination of these questions — and many different answers have been given to them in different lands and at different periods of history – form the most fundamental challenges of government. The allocation of rights of person and property among individuals, and the preserving of these rights against foreign invaders, have been from the earliest times, and still are, the most basic duties of government. By looking back, however, on the way in which organized government has come about, it is possible to obtain a guiding principle. The individual comes before the State – in time, and therefore in law. The State is the creation of people, and groups of people, who have banded together for mutual defence and mutual advantage, and it has no other purpose for its existence except to promote the benefit of those individual people who belong to it:

“Systems were made for men, and not men for systems, and the interest of man, which is self development, is above all systems, whether theological, political or economic.”(1)

It is perfectly true, of course, that by agreeing to live together in a society with his fellow men, a man agrees automatically to allow his neighbour certain rights and freedoms, which he in his turn expects to receive from the other members of the society to which he belongs. Society cannot continue in being unless this is the case, and it is, of course, the justification for Criminal Law. But basically it is turning the order of society upside down to say that the rights that the individual has come from the State. The reverse is true. The powers and the rights of Government come from the individuals who have set it up. It is not the individual who has only such rights as the State, by some “Bill of Rights” or other document, chooses to allow him. It is the State which only has such rights over the lives of its citizens as the people collectively have allowed it. As the great constitutional documents of our Common Law system – Magna Carta, the Bill of Rights, the Act of Settlement, incorporated into Canadian Law by our Constitution Act – go to show, the right of the individual to control his government is one for which ordinary people have been forced to fight – and have fought – from generation to generation. It is following this tradition, that Social Credit has established as its most fundamental principle, that
I. “The individual is the most important factor in organized Society. His opportunity to choose and refuse, where it does not infringe upon the same freedom in others, must be protected by the laws of the land, and safeguarded by the administration of justice.”

The Duties of Government
It is very important indeed that this basic principle of Government – that it must recognize the fundamental freedoms of the individual – take its rightful place in the world today. In times past – indeed up to as little as fifty years or a century ago – there were still unclaimed and undeveloped lands in the world to which those who found the policies of their governments intolerable could flee. Canada, in fact, was one of those countries, and can number among her population many people and many ethnic groups – United Empire Loyalists, Ukrainians and other refugees from persecution in Russia or Eastern European countries, Doukhabors, and so on – who came to her shores for the sake of freedom from a government that would not recognize their wishes at home. There is very little space left in the world today, for those who are persecuted or cannot agree with the policies of the government of the territory in which they live, to establish what for many hundreds of years has been possible – a new nation, in a new area, under a new form of government. Governments today, in fact, are in a position to blackmail their citizens. No matter how they defy the citizen's rights: no matter how far their policies may be away from the true interests of those that they govern, it is increasingly difficult for the average citizen to escape from their powers – and this is true whether the means used to keep the citizen in his place is an Iron or a Bamboo curtain, or progressively stricter immigration laws between nations, and the growing scarcity of “free land” in the Western Hemisphere where immigrants may settle to homestead undisturbed and in peace.

It is quite true that the processes of democracy do allow citizens to elect their representatives to Parliament, and that laws are not passed, except upon a majority vote of these representatives. This, however, is not the whole solution to the question. Each individual citizen is in fact in a minority – a minority of one. Even assembled into groups of thinking people, he may still find himself so outnumbered as to have no voice in his own government. “Party Government”, unless restrained in some way, in fact means that the strongest political machine controls the government, and so can put itself in a position where it can plunder the property of minorities, through unfair tax laws or otherwise, in order to improve its standing with the majority interests that have backed it. Democracy of this type, in fact, can be nothing else than a license to the strongest to plunder the weakest – the very negation of the principles that led to the establishment of government in the first place. For democratic government to fulfill its true function it must, in carrying out the will of the majority, also respect the eternal laws of right and wrong, and the position of minorities. The second basic principle of good government – the second principle of Social Credit – therefore combines with the Left or Liberal view, that the will of the people to do what they want to do must prevail, a Right, or Conservative, view that this action must be controlled within the limits of what is morally right and physically possible:

II. The major function of democratic government in organized society is to give the people the results they want in the management of their public affairs, as far as these are physically possible and morally right.

Good Administration
Having set down these two basic principles of government, we must move to examine how these apply to the actual administration of Society.

There are three basic directions in which a profit comes to society as a whole, from the working of human beings in cooperation. In an unjust society, this profit is likely to be monopolized by those who control political power, for the welfare of the strong and the detriment of the weak. In a just society – one that is governing in accordance with the will of the people, natural justice and fundamental concepts of right and wrong, this profit is one that is shared fairly among the people as a whole.

The first profit is that which comes to labour – to the workers – because their efforts being greater results than would be the case were they living on their own outside of organized society. This profit is abused when one person becomes so much the master of the services of another that he can use them entirely to his own advantage. This is a condition of slavery. An abuse to a lesser degree may exist when, for instance, through corrupt union practices, workers are forced to pay an unjustified tribute to a third party before they are permitted to engage in employment.

The second profit is that which comes to those who hold rights over land and over the natural resources of the country. When first a group of people takes possession of some territory, it is held by all in common – no one has rights to any particular piece. Quickly, however, the need for a private place for each person to live and for private ownership of land for farming, makes it clear that it is better that these common rights be to some extent at least broken up. Instead of each person having a partial right to occupy all the land, each person is given a total right to occupy a part of the land, make exclusive use of it and work its natural resources. If each citizen has an equally valuable piece of land allotted to him, obviously he is not the loser. On the other hand – and this almost invariably tends to happen in time – if a small class of landholders gain monopoly rights to the greatest part of the land, and the remainder of the population can only live upon it upon satisfying their terms, a great injustice is done. In a just society, those who enjoy a privilege given them by the State, of exclusive control of land or other natural resources, and by so doing, exclude others from enjoyment of the rights that they possess, should make fair payment to the State for the privilege. This payment, in turn, should be applied for the advantage of those who have lost their rights of common use of the land, because of the monopoly granted to the landholder.

The third profit is that which comes to the issuer of money tokens used by Society, as a result of the fact that the members of this society are willing to use them in the process of exchange. Even though these tokens may be no more than scraps of paper, or debased metal, they may be exchanged for goods and services of real worth, so that the issuer of the money token makes a handsome profit. In a properly ordered society, all money tokens are issued by or on behalf of the State, and the profit from so doing comes to the general treasury. In many countries today, however, issue of new money has become a private affair, yielding an unfair profit out of a public resource – the public credit – to those who have obtained this power of issue. The way in which this has occurred, the results this has caused, and what is necessary to put the matter right, will be a major subject of study in future chapters. Suffice it to say at the present time, that the abuse of the power to create the nation's money supply is behind some of the most acute economic problems of the nations of the world at the present day.

We have in this chapter examined briefly the basic relationship that exists between the individual and the group, and the basic justification for government, and guidelines which good government should follow. We have also examined three areas – that of labour, of land and natural resources, and of the public credit – where it is the duty of a good administration to make sure that an advantage that belongs to Society as a whole is not captured for private profit by groups who obtain for themselves, under unjust laws, a privileged monopoly position.

Those who obtain a position of private advantage at the public expense are in the position of parasites on the body politic. The more healthy and thriving a society is, the greater the chance for such parasites to take hold. The more power that such parasites obtain for themselves, the weaker grows the society upon which they prey, until the point of absolute collapse is reached. The challenge is therefore squarely laid before all who believe that there is something worthwhile saving in our Canadian society – to understand what is wrong and what is necessary to put it right, and boldly to work for sound administration of their government, in their own interest, and that of their children and their fellow citizens.

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1. What are the chief sources of man's increasing power over Nature?
2. Are Governments necessary? Why?
3. What would you consider to be the most basic duties of government?
4. Do you believe that the rights of Government come from the individual, or that the rights of the individual come from the Government? Why?
5. What are the first two basic principles of Social Credit?
6. To what extent, and for what reasons, should democratic governments respect the wishes of minorities?
7. The Social Credit government of Alberta introduced a policy of leasing the right to work the Province's mineral resources to the highest bidder. Is this policy in the public interest? How does it compare with the handling of natural resources in other provinces and countries? Who gains? Who loses?
8. Suggest three ways by which a profit comes to society as a result of people working together. Try and think of instances in your own experience, where private interests have been able to profit by taking to themselves profit that belongs to Society as a whole. In each case, who gained and who lost?

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E.C. Manning: “The Social Credit Yardstick” (Alberta Social Credit League)
J.S. Mill: “On Liberty”
George, Henry: “Progress and Poverty (Books V – VII in particular)
Adams, Brooks: “The Law of Civilization and Decay”
C.H. Douglas: “Economic Democracy”

(1) C.H.Douglas: “Economic Democracy” page 6
Lesson II – The Nature of Wealth

Everyone is interested in acquiring wealth. That is, he is interested in acquiring, not “wealth” merely in the narrow sense of material possessions in which the word is most generally used today, but those things which contribute to that person's “weal” or well being.

Viewed in this light, what goes to make up “wealth” will vary slightly with each different human being. Everyone, of course, needs a certain level of food, clothing and shelter in order to keep alive – but even in those cases, individual tastes will vary. A peasant in China or India can keep alive on rice, whereas in the Western nations, the basic food will be bread. The Inuit finds tents and igloos satisfactory for a nomadic life as a hunter in the Arctic – a modern suburban apartment would be useless for that lifestyle. The overalls that a manual worker needs are entirely different in material and purpose from the business suit of the company director. When we come to individual tastes in matters not so basic to survival, the variety of human tastes and requirements becomes even more bewildering. One person prefers going by car, another by train or bus. One person likes gardening, another to attend a sporting event. One person seeks education, another prefers entertainment. Not only are the forms of “wealth” endless, the particular circumstances a person is in can make a great difference as to how far any object actually contributes to the “wealth” of any person.

To a person who has no chairs in his house to sit on, the first chair he acquires is worth a great deal. Providing he has space for them, so too, to a lesser degree, are probably the next four or five. Somewhere around a dozen, perhaps, he begins to feel he has enough. By two dozen, perhaps, he begins to refuse to take more even if they were given him, unless he knew of some place where he could get rid of them in exchange for something he did want. By the time his total reached four dozen, probably he would be thinking even of paying someone to take a few of those chairs away!

Wealth, Value and Price
It is important, therefore, to understand that there is a difference between Wealth and Value. Wealth in effect consists of anything in the universe that may at any time be useful to any human being. The air we breathe is a form of wealth – we need it for our well being. If somebody came up to us with a box full of air, however, and asked us if we wanted it and if we would pay something for it, almost certainly we would turn them down. Because we have enough of it, and can get more every time we breathe, this extra supply is of no use to us – it has no value for us. It certainly would be of value to us, and we would be ready to pay almost any price for it, if for some reason we were cut off from our normal sources of air supply – trapped underground in a mine, perhaps – and that air stood between us and suffocation.

“Value”, therefore, is a personal matter. The degree to which we desire to possess a particular form of wealth is its value for us. Because our needs and desires change from day to day, and from hour to hour sometimes, so does the value we place on any particular form of wealth. Before lunch, a good meal will have considerable value for us. After we have eaten, the value of another meal in our opinion will be almost nil. A key factor, in fact, in our deciding what the value of any object or service to us actually is, will be in weighing up how strongly we desire it, and how easy it will be for us to obtain it in some other way.

Just as we measure distances in inches, yards, miles or kilometers, so we have units in which value is measured: in Canada these units are Dollars and Cents.

We can look around us at the hundreds of objects and services that do not belong to us, yet which we would like to have, and we can form an estimate in our own minds of the value to us of owning each of them, and this estimate is the “price” we would be prepared to pay for it. Similarly, we can in our own minds form an estimate of the value to us of owning property that is already ours – our home, our furniture, our clothes, our labour, and so on, and attach a price to each. Other people are likely to form their own, different, values, of the things that we and they own, and price them differently. Suppose, now, that I price a morning of my labour at $40.00, and a chair at $50.00. B, however, who has more chairs than he wants for his own use (he manufactures them), prices a chair at $25.00 and a morning of my labour at $50.00. If I go and work for a morning for B, and so give him a morning's labour, and B in exchange gives me a chair, I will feel very content. In my own mind, I will have made a profit of value of $10.00. B, too, will be content. In his mind, he will have made a profit of $25.00. Let us note two things about this transaction. First of all, that although dollars were used to measure value, no money was involved at all. It was a simple exchange of goods and services – pure barter. Secondly that, as is normal in any exchange, both sides make a profit. I made a profit of $10.00 (I obtained a chair for $10.00 less than I was prepared to pay). B made a profit of $25.00 (he had the use of labour worth $50.00 to him, at an expense of a chair worth to him only $25.00).

There is no black magic about the fact that both sides in an exchange deal make a profit on it. It is the direct result of people living in society and helping each other through mutual specialization and cooperation. Both sides gain, because their desires are more nearly satisfied. They have parted with wealth that was superfluous to them, and in its place they have obtained a form of wealth that they wanted to have. They have exercised their freedom of choice, and each has gained through the power of association, the “social credit” of Society.

The Source of Wealth
We have now seen something of the nature of wealth: how its value is established, and comes to be embodied in a price. A further question remains to be answered – Where does wealth come from, and how can the amount of it be increased?

The answer is that it comes from three sources. In the first place, a great amount of our wealth is available to us without any effort on our part at all. The air we breathe, the rain and water in the rivers, the sunshine, the fruits that grow on trees, and suchlike, come to us as a gift of Nature without effort on our part – though they remain wealth for all that. A second class of sources lies in what we can call mankind's “cultural inheritance” - the accumulated wisdom and know-how that has accumulated ever since the dawn of civilization, from language and writing, to all our modern knowledge of physics, chemistry and engineering, let alone cultural objects such as dance and music, poetry, literature and drama, rules for games and sports – the list goes on and on. A third and more useful class of objects comes into being when these or other resources are together worked upon by mankind, to increase their usefulness. The farmer tills the ground, plants the seed, and in due course reaps a harvest – this provides him with far more food, and far better food, than he would have had if he had left the ground to produce food unaided. His desires are better satisfied – his wealth is greater. In the same way, minerals are extracted, processed and manufactured into useful tools; trees are cut down for fuel, housing or furniture. Wealth of this type is not simply a resource as found in nature: it is a resource of this type that has been worked upon also by human skill and effort. Whether such wealth is of value to mankind, of course, depends very much indeed on how much the product serves to satisfy a person's desires, compared with how much effort and sacrifice must be made in order to bring it into being.

“Capital” and “Consumer” Goods
We can take our analysis of wealth even a stage further. There is a class of wealth which is immediately useful to us in satisfying our desires. In this class come such things as food and clothing, the home we live in, the transportation we enjoy, our newspapers, TV's, entertainment, and so on. This class of wealth satisfies us by being used up, or “consumed” for our enjoyment. Goods and services of this kind are known as “consumer goods”, and the people who use them are known as “Consumers”.

By contrast, there is a class of wealth that people acquire, not because they want to consume or make use of it personally for their own enjoyment, but because they wish to make a profit through resale or exchange with a person who ultimately wishes to consume it. This type of wealth goes by the name of “Capital”. It consists of all of the assets of business undertakings. It consists of the raw materials they acquire to be manufactured into goods. It consists of the land that the business owns, and its plant and machinery which in due course it is planned to use up and wear out in adding value to the raw materials that it processes. It includes the goodwill of the business as a going concern, and the inventory of all the goods that the undertaking has finally produced, but has not yet disposed of through sale.

Generally speaking, capital goods are of no great value in satisfying our present desires. One cannot go visiting on a bulldozer, or make one's home in a warehouse or office. However, such capital goods are of the very greatest value in providing consumers with the goods and services that do satisfy their wants. Capital goods are, in fact, the “tools” by which the consumer goods we wish to consume are actually turned out. By inventing more and more ingenious “tools” of this type, people are able to enjoy greater and greater wealth, with less and less effort on their part, and less and labour required in the long run for each unit of consumer goods produced. There is only one catch.

The catch is this. If we are to take time and effort to make tools – to make “capital” goods, there will be a short time when we will be not richer but poorer than before. We will have turned some of our time and energy away from direct production of consumer goods, and used it instead on producing tools that give immediate satisfaction to no one. After a little while, of course, those “tools” enable us to obtain more consumer goods with less effort than ever before. Before they do, however, someone is forced to make a sacrifice. The first cave man who stayed at home, putting together a bow and arrow so as to be a more efficient hunter, perhaps had to go without lunch while those who went hunting with their spears were able to eat. But with this new and more efficient weapon in his hand when completed, he could feel himself well content. His investment – the fact that he had diverted his time and resources away from acquiring food for immediate consumption in favour of making himself a better weapon for hunting - in the long run made him richer than before.

The Modern Situation
When we consider the ways in which wealth reaches us, we have come a long way from the primitive cave man. We have, in fact, probably come further in this direction in the past two hundred years – since the “Industrial Revolution – than in all recorded history before. We have harnessed the forces of nature – steam, fossil fuels, electricity, the atom – to give us power. We have developed new wonders in the fields of science and chemistry. The time has come when we can say that the problem of the production of wealth has been solved. Viewed as a simple problem, of the number of people living in our country today, the skills and resources that they have, and their factories and machinery, balanced against the needs of these same people for enough food, clothing and shelter to keep them reasonably alive, we can say that it is now possible not simply to keep all our citizens alive, but to do so in a fair degree of comfort. This should mean that our citizens should be enjoying wealth – that is, the means to satisfy their needs and desires – as never before.

Strangely enough, however, this is not the case at all. In Canada, for instance, over the past thirty years, not less than six per cent of the working population, and at times up to twice that proportion have been unable to find a job. They were in a position of having something of value to them which they were willing to part with – their labour. However, they could not find anyone for whom their labour would be valuable enough that they could sell it to get the products they needed in return. These same unemployed people went in need of the wealth they needed for comfortable living. They also had wealth of another kind, their labour, that they were quite ready to part with, but they could find nobody interested in making use of it. There had been a breakdown - a breakdown in the process of exchange. Our later chapters will examine the cause of this, and its cure, more closely.

At this point, however, many people will rush in with what seems at first to be an easy solution. “Let us conscript the nation's wealth” they suggest. “Let us take from the rich and give to the poor, and all will be well.”

Wait a minute. Will this really solve the problem? The problem, as we saw above, is not of anyone being too rich. It is one of exchange – of a person who has something he wants to exchange not being able to do so: of unemployed workers being unable to sell their labour – but also, of underemployed businesses unable to get rid of their products, even though the unemployed need them and could make use of them. This is obviously is the case, because if they could get rid of their surplus products, they would then find it worth while to take on more workers, even giving training to those who needed it in a new line of work if demand were brisk enough to make this worth while.

Add to this another point. Something is valuable to people, because they can use it to satisfy their own particular wants and needs. Unless people can keep their own powers of free choice, they will not get the greatest possible satisfaction. For this reason, Social Credit has laid it down as its third basic principle, that

III. “Economic security alone is not enough. We must have Freedom with Security.

Anything in the Universe which may be useful to a human being is a form of Wealth.

Wealth acquires Value as soon as any person wishes to possess it.

The amount of Value that a person sets on any piece of Wealth can be measured as a Price which is expressed in monetary units – in Canada, these units are Canadian Dollars and Cents.

Since the same objects have different values to different people, it follows that Exchange between people can bring Profit to both: that is, value received over and above value parted with.

Wealth comes from a nation's inheritance of culture and natural resources, but is greatly increased by human labour and skill. In the long run, it is increased even more in relation to the sacrifices people must make to obtain it, through the use of Capital – that is, goods acquired for resale, and tools to be used up in the process of production, preparing them for final consumption.

In the modern world there is no need for poverty or any lack of a sufficient basic amount of wealth to satisfy human needs. Poverty arises, however, when those who have something valuable that they are prepared to part with, often their labour, are unable to exchange it for the goods and services they require. It arises, in fact from a breakdown in the process of Exchange, not from a breakdown in the process of Production.

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1. What is Wealth? Does it have the same value for every person?
2. What factors affect the value of any article to a person?
3. What are the units in which value is measures?
4. How is it that the process of exchange can increase a person's wealth?
5. How does Profit arise? Can both parties to an exchange profit from it?
6. How is wealth produced? Is human labour essential to its production?
7. What is Capital? What is the difference between “capital” and “consumer” goods?
8. Is wealth in any way connected to personal freedom? How?
9. What is the third basic principle of Social Credit?
10. Has the problem of production of wealth been solved? How? Why then do we have poverty?

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Soddy, Professor Frederick, “Wealth, Virtual Wealth and Debt”
Hattersley, C. Marshall, “Wealth, Want and War”, particularly Chapter 1.