Monday, March 09, 2009

"Change" the Wealth Paradigm

Given that the global economy and monetary system is in shambles there has been plenty of talk of "change". There is always such talk in times like these. The folks at the White House have been quoted as saying in regards to change - "it would be a shame to let this crisis go to waste". There will be change...

The Obama Administration has wasted no time instilling the fear that if we don't "change" how things are done and let the government take over and direct our economy WE'RE ALL GONNA DIE! (In some future post I want to talk about the use of fear mongering as it applies to the left and the right, a fascinating juxtaposition when compared side by side). Still, "change" can be good, it can make things better, but it can make things worse too.

For now lets talk about how money and wealth is created. Since the beginning of time wealth has been created by the production of goods and services. The earth itself (for now) is the source of all wealth in one way or another. The farmers crop, the output of mines and the fish netted by the fisherman are wealth. Wealth is not to be confused with money. Money is a essentially banker's note with implied value. A dollar bill is just a piece of paper, deposits are merely book entries on a bankers ledger.

What makes money valuable? According to the Federal Reserve Bank of Chicago - The fact that checks, paper money, and coins are acceptable at face value in payment of all debts and for other monetary uses is due mainly to the confidence people have in it. That's all. We need to be assured that these bank notes will be usable for other financial transactions and for real goods and services where ever and whenever we choose. Money gets its value from its scarcity in relation to its usefulness.

So our money is backed by our confidence in the system. That's it... Does this bring any clarity to the situation we find ourselves in. The stock market is tanking, our 401K accounts are disappearing before our eyes and why? Because no one has confidence in the system. Where does confidence come from? Wealth creation? No, think about it - farmers are still farming , miners are still mining and fisherman are still fishing. Confidence comes from the creation of new money. And how, pray-tell does money get created?

This is where is gets interesting.

Early on when the concept of banking was just getting started those with wealth needed a way to trade for other goods and services without having to lug around bags of gold and coins (or fish). Goldsmiths provided safekeeping services, making a profit from vault storage fees for gold and coins deposited with them. The receipts they gave out, which came to be known as bank notes, became acceptable as money since whoever held them could go to the goldsmith/banker and exchange them for real metallic money. The bankers, in a eureka moment, realized that they could make loans merely by giving their promises to pay, in the form of bank notes, to borrowers. In this way, banks began to create money.

So there you have it: banks create money simply by making a loan. If you really think about it you realize the truth. When a bank creates a loan it puts money into the economy it picked out of thin air. So you can now see that when the credit markets dry up and no one is taking on debt the economy suffers from an acute lack of money.

Here are some quotes that illustrate what we just learned (taken from http://moneyaswealth.blogspot.com/2008_10_01_archive.html)


“…the actual creation of money always involves the extension of credit by private commercial banks.”
- Russell L. Munk, Assistant General Counsel, Department of the Treasury

“Money is created when loans are issued and debts incurred; money is extinguished when loans are repaid.”
- John B. Henderson, Senior Specialist in Price Economics, Congressional Research Service, Report No. 83-125 E

“Thus, the money that one borrower uses to pay interest on a loan has been created somewhere else in the economy by another loan.” - John M. Yetter, Attorney-Advisor, Department of the Treasury

“Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon.” - Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta

This means we are in vicious spiral with no way out. The economy is doomed. Something has to change.

There are groups of people in Minnesota with some very interesting ideas. Ideas that seem incomprehensible but certainly make some sense. The main idea can be summed up with by this short article.

http://moneyaswealth.blogspot.com/2008/10/minnesota-transportation-act.html

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In March of 2008 there was an historic hearing in the Minnesota House and Senate. The Minnesota Transportation Act (MTA), in the form of HF 619 and SF 500, would fund the rebuilding of bridges and roads in Minnesota using Transportation Certificates, in lieu of bonds, or increased taxes.

This is a robust, wealth based concept, with newly created money from State Chartered Banks flowing into the economy. New money flows from the Bank, to the State of Minnesota, that pays the Contractor to build the roads and then pays the Workers - they continue the movement of the new money into wider circulation:

1. debt free
2. interest free
3. inflation free
4. tax free


The State Chartered Banks create the money the same way they do it now - electronically.

Creation of the new money is limited by production and the infrastructure supports the new money, so it is inflation free.

It is not a loan, so it is debt and interest free, bringing down the cost of production.

Because the State no longer needs to tax for bridges and roads, the fuel tax can be eliminated and Minnesota property taxes get immediately reduced. Again, the cost of production drops.

Jobs will be created. A boom in Minnesota's technology sector will occur as we build infrastructure that is more gentle on the environment. Innovation, investment and savings will be the result.

The public gets safer, modern roads and bridges with which to conduct commerce.

1. Banks win - lower default rate, increased liquidity and a tax break
2. Minnesota government wins - balanced budgets, national leadership
3. The people win - lower taxes and prices, plus safer bridges and roads
4. The US wins - Minnesota paves the way into a new era of prosperity

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Interesting - can it possibly work? Your thoughts?




CW

2 comments:

Randy said...

Thank you for sharing very useful information regarding wealth creation.There are numerous opportunities where you can make money online and also offline. All you need to do is go for the opportunities that will suite you.Wealth creation requires discipline in spending. If you don’t have budgeting traits, you can consider taking an online course on financial management so as to be on the right path to wealth creation.

ProductionEconomics said...

Randy,

Wealth creation always and only involves three things. It happens when we combine our labor with our natural resources and our great ideas. When wealth is created there is no debt. When our money is created, it is always created as interest bearing loans(debt). There is no money until someone borrows it. What we use for money is an evidence of debt and is not in any way, shape, or form, an evidence of wealth. But we could change that if we enact The Minnesota Transportation Act.

Making money does not create any wealth, it only creates more debt. Anyone who tells you that wealth creation requires disciplined spending is lying to you. Wealth creation only and always involves three things. It takes combining our labor with our raw resources with our nearly limitless ideas. That is how all wealth is created.

My biggest question is since all of our money is created as debt. If you went and got a loan from a bank(which is the way all money is created) and tried to pay me with it, why in the world would I want something that you owe someone else?