Good Money, Bad Money

The following is actually an outline for my next speech on the history of money. Internalizing this information will answer many questions surrounding the economic chaos you see all around you. And now, here’s the outline of the speech:

Speech 4 – Good Money, Bad Money

1. In our last speech, we drew up on the white board how the creation of more money stock automatically devalues the proportion of wealth correlated to each existing money unit. If you know anything about how the stock market works, you know that when companies issue additional shares of stock it lowers the value of shares already in circulation.

2. We asked the question “who could be in the position to do this and why would they do it?”

3. We now go back in time to the period where over the centuries, gold had been selected for use by society as a money stock. While gold is divisible, it’s not easily divisible by anyone other than a metal-smith. Imagine shopping in a bazaar and each vendor having a scale to weigh gold. Each transaction is a very timely proposition as just the right weight of gold must change hands.

4. To overcome this barrier to trade private banks and gold houses introduced the concept of coinage. Coins were minted in precise weights with the coin bearing a number that indicated the weight of the coin. The coins were also of a guaranteed purity. Citizens and vendors alike could toss out their scales and transaction times were greatly reduced as people could make change by visually looking at the numbers on the coins. Coins issued by multiple minters circulated simultaneously, side by side, with no problems, because the weights were plainly stated, were precise and the purity guaranteed.

5. One time-honored tradition among certain segments of all societies is to call into question the integrity of any private enterprise and suggest that government is the only entity that can be truly trusted by the people. Private minters, after all, could mint coins with weights lower than the stated face value, thus defrauding the public. In any case, governments around the world tossed their hat into and began minting coins that circulated side by side with private coins.

6. Of course we know from innumerable examples in history that governments were the very first and about the only minters to defraud the public. By making coins weighing JUST less than the stated weight, or by equaling the stated weight but having centers made of lead and merely coated in gold, governments were able to mint more coins than there was actual gold. And of course by keeping some of the coins themselves, governments now had money to pay for endeavors such as wars, roads and services that they did not have to “tax” as much for, thus endearing their public to them, seemingly by being able to pay for these goodies out of thin air.

7. Observant people are everywhere and it was realized that the government coins were not as fully valuable as the private coins, face value claims of weight notwithstanding. And slowly, people began keeping the private coins and only circulating the government coins. This is the basis of Gresham’s Law. Sir Thomas Gresham was a 16th century English economist who stated that “bad money drives out good money”.

8. Private coinage was driven out of circulation as a money stock, but still held on to by individuals as a store of value, a practice that continues to this very day, witness the Canadian Maple Leaf, etc. As the decades and centuries marched on, the numbers imprinted on the coins lost their original meaning to the citizenry. The numbers certainly no longer actually represented the weight of gold in grams, ounces or any other unit of measure. Coins were now minted that contained little or no gold at all but still had numbers on them that indicated some number of units. These units, dollars, pounds, lira, etc now became entities in their own right. However unlike gold, governments can create as many of these units as they want, with no limits upon them at all.

9. That brings us back to our close from last time and our analogy of the money supply to poker chips. Who’s in a position to create more poker chips (money) and why would they do it? The answer is government is in the position to do it because of Gresham’s Law. They have driven “good” money out of circulation and 99.999 percent of the people have no clue what a coin is supposed to represent. They think that a “dollar” is something that has intrinsic value. It does not. The “why” is because they want to curry good favor with citizenry to stay in power by showering them with governmental goodies. There are two ways to do this: Tax them at the required levels with income tax rates of 50, 70 or 90 percent and cause a revolution, or do it with the hidden tax of inflation and the the continued creation of “bad money”. The people’s wealth is stolen just the same, but they feel much better about it because they still have the same number of “dollars”… whatever that means.

10. Ladies and gentlemen, you now KNOW the FACTS of history. They are recorded facts and they are indisputable. YOU can continue to vote for politicians who seem to promise everything to everyone, or you can demand more from those who would be your elected officials. Those of you in this room now possess the burden of truth. You can turn away from it or you can demand REAL change, not fake change. Future generations are now counting on you.

In Defense of the IRS

During a presidential election year, so-called second tier candidates look for any means possible to grab the attention of the electorate and pull themselves up into the top-tier. One of the most popular maneuvers is to call for an end to the Federal Income Tax and/or an end to the Internal Revenue Service.

I admit right here that I come from a conservative/Libertarian background for the majority of my life and have never been a big fan of either the IRS or the income tax. But then something happened – I became more educated about both and my viewpoint has changed dramatically.

Before I tell you why the IRS and the income tax are never going away, I’d like to make something clear: do not confuse my support of the IRS and income tax with support for runaway government spending, the inflationary printing of money, congressional earmarks and the like. I believe that there are things governments should spend money on such as national defense, court systems, roads and other essentials. However, the federal government spends enormous amounts of money on activities it shouldn’t be involved in. You’ll get no disagreement from me on this.

Now, back the IRS and the income tax. If you accept the premise that the government should fund certain activities, then you must also accept that the money has to come from somewhere, hence taxes.

A case is often made for a national sales tax. While appealing in theory, some remnants of the IRS would still be necessary to verify actual levels of income. Why? Because a sales tax is so regressive in its nature that almost certainly the federal government would provide rebates (or “pre-bates”) to lower income people to help them offset the impact of the sales tax. But the real problem with a national sales tax arises from the level that would need to be charged and what would result. This election year a sales tax has been floated at rate of twenty-three percent. A sales tax rate at this level will most undoubtedly result in a thriving black market. If you think we have a violence problem surrounding the illegal sale of narcotics in the country, wait until you see the criminal activity leap when nearly everything becomes a candidate for back-alley sales. You won’t have to be an addicted crack-head to fuel this movement, merely a regular Joe who wants to save five hundred dollars on a plasma television.

The tax code, I learned, while primarily concerned with creating revenue, is also a tool for economic change and social influence. Consider the case where the economy is suffering. Congress can enact tax legislation that provides incentives, such as immediate expensing, for capital equipment purchases. And, in fact, this has just recently occurred, as the economic stimulus package just agreed to between Congress and the president provides an immediate expensing of fifty percent for purchases of new capital equipment, as opposed to depreciating it over many years. I prefer this method of economic stimulus much more than the oft-inflationary tactic of lowering interest rates, which has the effect of lessening the value of all those dollars you’ve worked so hard to save for retirement.

The complexity of the tax code is mind-boggling, particularly to the layman. If one takes up the academic study of taxation, there is a foundation that actually has both rhyme and reason. It is the details above and beyond the foundation where the inordinate complexity comes in. However, this complexity is not the result of an intentioned, thought-out plan to confuse you into oblivion. Rather, it is a response to you, the taxpayer. Most people think of money changing hands as cashing their paycheck, going to Wal-Mart and paying their bills. The reality is that there are innumerable ways for money and consideration to change hands. The tax code as it exists today is the result of an “arms-race” of sorts, between those who make the money and those want a piece of it. Think of money as water, our economy as an enormous mountain and the tax code as little barriers erected along the mountain side, intended to prevent some of the water from reaching the base of the mountain. What happens is that water continually flows over and around the barriers, looking for new ways to make it to the bottom of the mountain. In the same way, companies and individuals continually look for ways to make transactions that will skirt the letter of the (tax code) law. Once a successful way has been found, the tax-man often takes the inventor of this new way to tax court. Some times the IRS wins and some times they lose. Believe it or not, the IRS does lose quite often in Tax Court. When they win however, the results are codified in a new treasury regulation or revenue procedure or revenue ruling which has the effect of law. This process is repeated until you have the tax-code that we have. It’s a series of actions and reactions

The ability to influence social behavior via the tax code is not a power accorded to the government in our founding documents and I certainly don’t advocate it, but the power exists and the reality of the situation is that Washington simply does not divest itself of power it has acquired. Let me give you a simple example. The Hope college credit is available to students in their first two years of college, or to their parents, assuming the parents are paying the tuition. The taxpayer becomes ineligible for the Hope credit if the student has been convicted of a narcotics-related felony. Apparently, assault, robbery and other such felonies do not disqualify one from eligibility for the Hope credit, just drug use or sales. Clearly this is an example of attempting to influence behavior through the tax code, and, as I said earlier, Congress simply does not divest itself of this sort of power, regardless of what any presidential candidate may promise.

Another reason that the complex tax code will never be completely replaced by flat tax or a sales tax is purely political in that the current code provides the flexibility for each major political party to “throw bones” to their constituents and not dramatically affect the amount of revenue that the income tax brings in. For example, Republicans like to lower rates paid by business and then campaign to those affected as having “delivered the goods”. Democrats meanwhile like to raise rates on business and the wealthy and then flaunt it to their constituents, the low and middle classes. That this does not help the poor and is merely the politics of “sticking it to the rich” is of course pandering of the worst possible kind. You see, politicians’ every move is driven by voters and voters are driven by a “what have you done for me lately” attitude. In his book “Hardball”, author and political commentator Chris Matthews gives a real-world example of exactly this from his days as a young staffer in Washington:

“Soon after I went to work in the Senate, my boss, Frank Moss of Utah, decided to offer an amendment I had drafted. It dealt with the minimum wage. I had noticed that, over the years, the minimum-wage increases periodically approved by Congress consistently followed rises in cost of living and in productivity. The amendment I recommended to the Senator would have pegged annual minimum-wage increases to these two indices automatically. I expected it to attract considerable support from the pro-labor senators on the Democratic side of the aisle, but it claimed just fifteen votes. Later I would learn the reason. Democratic politicians were not about to give up the opportunity to raise the minimum wage every few years, the kind of sugarplum that helped them with the working people of their districts and kept labor involved in the party legislative agenda.”

Almost nothing provides more “sugarplums” than the tax code. The government cannot not pay your mortgage, but it can make the interest you pay a deduction. It cannot pay for everybody’s college, but it can give you a credit for some of the tuition you pay. It cannot force you to find a job, but it can encourage you to work by putting free-money, such as the earned-income tax credit into your pocket, whether you pay taxes or not. Why on earth would politicians, whose only real concern is getting re-elected, ever cede power over the broadest and deepest goodie-bag in the country? They would not and they will not and every politician knows this – but you don’t – and that’s why political hopefuls throw this out there every few years, because the masses think it’s possible. You’ll note that no incumbent has felt it necessary to make the arguments I have to derail a challenger. Promises to abolish the IRS and the income tax are usually made only by fringe candidates with no realistic chance of winning. An incumbent on either side of the aisle will never admit to the things that have been discussed here. It’s simply not talked about in the light of day, at least not to the masses. At most, you may catch glimpses of it in books written by politicos for politicos, such as the Chris Matthews book. It would be very interesting to see such a promise made by a candidate who did have a realistic chance of winning an election. I suspect that you would see some of these arguments presented by the incumbent, only spun in a more favorable light.

The final political reason that the IRS is not going anywhere has to do with demographics. Fifty percent of the population in this country legally pays no tax or pays very little tax. Further, many of the people who pay no tax actually get money returned to them in the form of the earned-income tax credit. What complaints might these people have with the current system? None, I suspect. I imagine they like it very much. I know I would. Since a democracy is based on a majority rule, you would have to convince at least some of these voters to get rid of the IRS and the income tax. Well, good luck with that.

In short, I don’t necessarily love the tax code we have, but, I understand that it has a job to do, the reasons why it is as complicated as it is, and most of all I understand the political reasons of why it’s never going away. So, if you’re one of these folks who spends your life burning up a lot of energy, dreaming of a day without the income tax or IRS, my suggestion is you go find another worthy cause and channel your energy toward something where it might actually have a chance of becoming reality.

In Defense of Iran

Disclaimer: I am a former U.S. Marine and proud of it. This may rile up some of my conservative friends, but oh well, I’m not a conservative anymore, I’m a Libertarian 🙂 I am still working on confirming a few details, but this is a theory I’ve developed and have discovered substantiation for quite a bit of it.

In 1971, the United Stated ended the last link to gold-backed currency. The dollar was now 100% fiat currency. In 1974, OPEC countries, most notably Saudi Arabia, began to accept only U.S. dollars for oil transactions. This meant that countries wanting to purchase their oil had to buy dollars on world currency markets and then buy oil. This became known as the “petrodollar”. This artificial demand for the USD on world currency markets allowed Washington to print money and spend it as they saw fit, without the downside of third-world runaway inflation, as oil buyers around the world bought up excess dollars. Because enormous amounts of dollars were funneled into very few pockets (Saudi monarchy, etc), the vast majority of these dollars were effectively taken out of circulation, thus restraining the growth of the circulating supply of dollars.

In 2000, Saddam Hussein broke ranks with OPEC and stopped accepting US dollars as payment for Iraqi oil. The U.S. government, well aware of the implications of this, was not pleased. The terrorist attacks of September 11, 2001 provided the first plausible cover that the United States needed to remove Saddam Hussein from power. It is noteworthy that Iraqi oil is once again traded only for US dollars.

The topic of Iran frequently makes headlines. The rogue state and it’s nuclear ambitions are frequently discussed. There’s no question Iran is a rogue state and I certainly am not a fan of its government. However, what if its nuclear aims are defensive in nature? What if Iran, seeing the true value of its oil decline with the dollar has plans to also end accepting dollars and demand another currency? Euros for instance. Having witnessed the Iraqi experience, perhaps Iran wants to exercise control over its natural resources and exchange them for a commodity with more “staying power” than the dollar. The rise of Venezuelan and Russian oil in recent years has begun to deteriorate the petrodollar, as these countries accept US dollars, but do not demand them.

Since 1974, the US has enjoyed the spectacularly enviable position of being able to “print oil”. Other countries must trade REAL wealth for oil. The United States merely prints the money it needs for oil and keeps its treasure for other purposes. There is a great deal of news and history that has been shaped by the “petrodollar”, but nearly all of the populous is unaware of the history of the petrodollar.

Stillborn Dream

The thought, like a broken record, kept playing over and over in his mind: “This is the worst night of my life. It will never be worse than this.

It was midnight. It had been about seven hours since he’d first heard the news. Their baby was dead. Looking at his wife, lying upon the hospital bed, it seemed hard to believe that the belly which only yesterday held a moving, living, baby boy, now only contained a body waiting to be delivered into the world as a corpse. Why couldn’t they simply remove the baby via cesarean? It seemed particularly cruel to have to go through a prolonged delivery process. For what?

He’d taken the call at the office in the late afternoon. His wife’s voice crying into the phone that something was wrong – horribly wrong. The voices of his co-workers, who knew they were expecting, laughed and cheered behind him as the young father-to-be rushed out the door. His back to them, they did not see the look of panic that gripped his face.

Arriving at the hospital he burst through the double doors of the maternity ward, asking for his wife by name. The faces at the nurse’s station fell in unison. The look of sympathy and the glances that, almost apologetically looked away, seemed to confirm his worst fears.

The doctor was an immigrant, his English broken. His finger hovered over the ultrasound. “See this here? This is the heart. It not beating. I am very sorry for you. These things happen sometime”.

“Why? What happened?” He couldn’t tell if he was whispering, shouting or crying. It sounded as if somebody else were saying the words.

“We don’t know until we see baby”, he said.

“So what happens now?” he asked.

“She will deliver baby.”

“Deliver?”, he asked, not able to believe it. “Can’t you just, you know, cut it out?”

“No”, he said, seeming to suppress a chuckle. “Cesarean is major surgery. We not do that unless necessary. She will deliver”, he said. With that, he left the room.

For the first time, they were alone.

His wife had a look of quiet anguish on her face. They did not speak until he said, “I can’t believe this is happening. What… what happened?”

She spoke softly, the light glinting off her tear-stained cheeks as she said, “When I woke up this morning, something just felt wrong. I couldn’t feel him move. Everything just felt strange. I went to the doctor and he said he couldn’t hear the heartbeat and that I needed to get to the hospital to see if they could hear the heartbeat with better equipment.”

You drove yourself here?” he asked. He tried to imagine his wife driving in traffic knowing that her baby was probably dead. “Uh huh”, she replied. He stood and brushed her hair aside with his hand. “I love you”, he whispered. “I love you too”, she said.

And so it began. The waiting. He had never experienced anything like it before. This must be what it’s like, he thought, to be on death row the night before one’s execution. Only then, the hour is known.

Minutes seemed to last hours. He imagined himself playing catch with his son. He imagined him again as a young man, adjusting his tuxedo in a mirror before the high school prom. Random thoughts flooded his mind. Stop it! Stop it! STOP IT! And yet, he could not stop. Worse, as painful as the thoughts were, there was almost a perverse, twisted, yet comforting pleasure in the exercise. He knew this was as close as he would get experiencing these events, so, why not wallow in them, no matter the pain?

He looked at his wife. He couldn’t imagine what it must be like for her – her constant companion of these past months, now gone. He felt guilty. He should be talking to her, comforting her, supporting her. He felt as if she were lying there, limbs severed, bleeding to death, and he, missing limbs of his own, was unable to stop the flow.

They should have slept, but neither could. The grief, the unanswered questions wouldn’t allow it. And so, the silent vigil continued until the first signs of a distant dawn began to lighten the ink-black sky.

A doctor, different from yesterday, and a nurse appeared. It was time. As the delivery progressed, he peered down and could see the top of the baby’s head. Bright, overhead lights shone down upon him as the nurse turned to him, saying, “He has your color hair”. Under ordinary circumstances, the comment would have been met with a wink or a laugh. Here, now, the young father wailed a long, deep sob. It was the kind of cry that upon hearing, one hopes to never hear again.

Finally, the baby arrived. The mystery was no more complicated than the umbilical cord wrapped tightly, like a hangman’s noose, around the baby’s neck. No genetic disorder, no birth defects, healthy in every way except that terrible one way.

Treating the lifeless body with the same care as if he were alive, the nurse cleaned him, diapered him and wrapped him in a blanket. She put a little knit hat upon his head before gently laying the bundle in his mother’s arms. No words were spoken.

The nurse left the room, leaving the young family alone for the first and last time.