Saving The World, Revised Edition, Part II

The law can do all these things.  But it would have to be the most fundamental and unarguable kind of law:  in the US, for example, it would mean a constitutional amendment.  But in any case, these things can be done only by the most undisputed authority, whether king or pope or constitution.

1.  Universal debt jubilee:  This remains the centerpiece of the proposal.  Don’t let the word “jubilee” fool you.  It’s not all partying and celebration.  The vast majority of people will probably gain, or at least gain as much as they lose if a jubilee occurs.  But there are some people who would not gain while at the same time losing a great deal, and so many things that people are used to relying upon would disappear:  pensions, social security, bonds, t-bills, the entire derivative architecture, however many trillions or even quadrillions it “nominally” is.

All gone.

The only exceptions to the debt cancellation are bank deposits and government currency, what most people think of as being “money” proper.    Conveniently, the “dollar” (or any other nominal unit of account in any other country with a central bank) amounts of both can be determined with near absolute certainty.

Now.  Why does a debt jubilee need to be done this way?

If you wish to review, see here and here, along with some following explanatory posts.  We have to do it for the children.  Of course.

Briefly, though, we have to exempt the currency and bank deposits because otherwise they would be cancelled too, and there would then be no existing money, since money that actually circulates is pretty much always debt, paper or (in more modern times) electronic.

You see, it is misleading when people derisively refer to “paper” money or even “debt” money.  Neither of those is the problem in and of itself.  The problem is that the debt or paper or computer digit – that is, no matter what form it takes – is irredeemable.  That can never be the case, not even for the government.

Which brings us to the second component of saving the world:

2.  Money will henceforth be redeemable in gold.  As I indicated before, in order to accomplish this the dollar price of gold will have to be extremely high.  Let’s just call it $30,000 per ounce for now.  The reason for this is that there is only so much gold the country has available for this purpose – something like 8000 tons or 256 million ounces – and that would have to cover all the outstanding currency and bank deposits, which amount to something like $7 trillion.

That figure ($30,000/oz), that is, will permit all currency and bank deposits to be backed by – that is redeemable in – gold.

But this is where my thinking on the matter has changed considerably.  Rather than a gold “standard” that is inflexible and fixed by law, I think it would be better for the present and the foreseeable future to have the central bank empowered to change the dollar value of gold at will, subject to one restriction:  the central bank can redefine the dollar in gold quantity terms, but can never exceed the initial dollar price.  In other words, the $30,000 figure will constitute a cap on the dollar price of gold.  From there it could be reduced, then increased again, practically ad infinitum, all the way down to very low dollar amounts, but could never exceed $30,000.

The government and the populace have become accustomed to the government having the power to control the money supply.  Currently this is done indirectly through setting interest rates for borrowing, setting reserve requirements for banks, and (primarily) buying government securities through “open market” operations.  The idea is to dispense with all that and just change the money supply directly by changing the value of gold in dollar terms.  Lowering the dollar price of gold will have the effect of reducing the money supply by reducing the number of dollars; increasing the dollar price of gold – though never beyond the cap – will have the effect of increasing the money supply.  Because this would be done openly and publicly, and because it is a simple direct ratio, everyone will know just what has been done.  There will be no “lag” between the implementation of monetary “policy” and its effects on the money supply.  There will be less opportunity for profiting through manipulation based on changing monetary policy all by itself.

Now, thinking this through a little.  Which is important.

The first thing is that with gold initially at a capped price of $30,000 per ounce, the profit to be had by mining or otherwise producing gold would be irresistible.  The entire money stock of the country would be $7 trillion, in a situation where we are used to describing annual GDP alone as more than double that figure, and where estimates of the current available liquid money supply are somewhere in the vicinity of $50+ trillion.

Put another way, the jubilee will annihilate in one fell swoop something over 80% of the liquid money supply.

With the liquid money supply so greatly reduced, and with no way to expand the money supply other than by producing more gold, wages and prices will collapse in dollar terms.  A complete readjustment will occur to the downside:  a loaf of bread, for example, will probably go back to being pennies.  Dollars will become very “dear” – but you’ll be able to get 30,000 of them for a single ounce of gold.  If free market thinking means anything, there will be a mad scramble into the gold producing business.  Indeed, the very point is that since the effect of the jubilee will be to have annihilated so much of the money supply by annihilating so much of the debt that constitutes it, this will be a Good Thing, as the need for liquidity will be acute.

But note two things:  first, subject to the $30,000/oz cap, the central bank will still control the money supply, because even as more gold is produced they are free to reduce the dollar price of it.  No doubt this would be undesirable when what is most urgently required is an increase in the dollar denominated money supply that producing more gold can provide at a constant dollar value, but the option is there and remains on the table even as more gold – and thus more “dollars” are produced.

Second – and this should be entirely beneficial in a “real economy” way – while it would become highly profitable to produce gold, it would at the same time become, by definition, unprofitable to buy it or hold it, since the dollar price will have been not only set, but capped.  In other words, you could never make money in dollar terms by buying gold at the capped price, because it can only go down from there; and if you were holding gold, you could stay even but never make a profit in dollar terms, since the dollar price could only go down, never up.

Indeed, there would only be one thing to do with gold at that point – sell it to the government in exchange for the highest number of dollars it will ever bring, which the government can freely issue to you so long as it receives gold to back the notes it thereby hands out.  Other trading in gold would effectively disappear, except in final payment situations where it would simply be functioning as a proxy for dollars anyway.  At least, until the central bank had acted at some point to reduce the dollar value of gold and had the potential to increase it again.

Now a point or two overall about this second step.

What I have outlined here is a break from every school of economic thought, whether Keynesian or Austrian or Chartalist or whatever, but it is most closely based upon the Chartalists’ understanding of the nature of money and the government’s necessary role in any rational and functioning monetary system, a role that is apparently rejected by most Austrians but then again utterly perverted by Keynesians.

The difference between me and the Chartalists is that they think the government can and should ultimately dispense with redeemability, and I think this is a grave error.  The government, in my view, can’t get the idea that they are not bound by the laws of nature and elementary logic, and this is the evil that monetary irredeemability fosters.  Formal, de jure irredeemability means not just a broken promise, but an illusory one.  A deception.  A promise to pay which is not only never kept, but is never even intended to be kept.

No one can be granted such a power.  It is Tolkein’s One Ring.

In and of itself irredeemability is bad enough, but the idea also replicates throughout government and then society itself like a virulent pestilence, and before you know it even courts of law do not believe they are bound by any such thing as law, that indeed there are no such things as law or even “facts”, other than what someone wills them to be, and that someone is always the more powerful player, the one who possesses the ring and believes in it.

Contending with this viewpoint is the central problem of lawyering.  Arguably, it is the central social problem we face.  Indeed, arguably it is the central problem of our own souls.

But let’s not go there.  Some things just have to be left to fend for themselves.

Now, there are a few incidental things, not as essential as the first two (the jubilee and dollar to gold redeemability), but designed to ease the transition to what will be a completely different economic reality.

Next post.

 

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14 Comments

Filed under financial crisis, Judicial lying/cheating

14 responses to “Saving The World, Revised Edition, Part II

  1. OK. As a newbie to economic theories, I can’t say I understand all of this post. My question is, are we stuck with the concept of supply and demand being a heavenly force that determines price/value, or can we adjust this thinking to a more localised approach to currency that has a more compassionate view on the needs of the people, and less reliance on the ruthless nature of price discovery mechanisms?

    • Well, this post is more about how the monetary system distorts all the other aspects of economics, including supply and demand and price discovery mechanisms. A currency, whether local or more centralized, is necessarily unforgiving if it is to have any economic meaning. This is not to say that “compassion” and “the needs of the people” are irrelevant, only that they have nothing to do with economic reality. In fact it would be impossible to count the cost of compassion and the needs of the people unless economic reality were independent of them, although it is also true that the needs of the people should, as a general rule, be met through their own economic activity.

      I trust this doesn’t seem like double talk.

  2. Dear RMRJ,
    I am new layman in the legal field but would like to comment on this other subject.

    After 25 years at Kodak The divorce took one half of the pension for my ex-wife, (a Livingston County Visiting nurse, and then the Livingston County Support Enforcement Agency “Froze” the other half for “supposed” child support arrearage. I was homeless for four years and they have upped the ante to 75K plus 40K interest, (since yr2001). I am happy just to be alive…

    also in my warped mind a 401k turns out to be a 4/01 joke unless everything goes exactly to “their” plan???

    also just a little poem I am working on…

    “HELP WANTED”; AN EXORCISM ON WALL STREET…
    SOMETHING’S STRANGE IN THE NEIGHBORHOOD…
    WHO ARE YOU GOING TO CALL???
    “GHOST-BUSTERS???”

  3. Wil

    Your thinking is quite progressed, relative to the Zero Hedge comment banter over gold that inquisitively led me to your post. Your research on monetary history led you further down the trail than most, but where I take exception is in any artificial “decree” as to the “price” of gold. It cannot be pegged, suppressed, nor capped. It’s international trade balancing and settling purpose is too important for that. It’s you own understanding of the manipulation of gold by the forces who “issue debt money under political control” that led you this far, yet you want to “cap” the free market price of gold. You need to think about foreign exchange rates between currencies and the regulatory role gold plays in exchange rate stabilization of the free market kind, not the kind practiced by the exchange stabilization fund in the name of “strong dollar policy”.
    I admire your intellect. You’re ready for FOFOA. A speed reader could take most of it in, in a few weeks. I think you’ll find my last couple blog posts and the link to FOFOA’s last post relevant to your argument here. Thanks for thinking critically, and good luck. Wil

    • Thanks for the comment. I looked into that FOFOA freegold stuff some time ago, and recorded my thoughts here:

      http://strikelawyer.wordpress.com/2011/02/12/freegold/
      http://strikelawyer.wordpress.com/2011/02/13/freegold-fail/

      I think we’re not really addressing the same problem. FOFOA and freegolders see an economic or financial crisis, the break down of civilization and want to save something for themselves. I see a rule of law crisis and would rescue civilization if I could by restoring the rule of law, upon which civilized life depends. And if need be, and not in any way desiring it, I would willingly give my life in the effort, because the uncivilized life is ultimately unbearable and degrading to human beings, in my view. It’s objectionable to me to stand idly by while humanity is degraded.

      Not to mention I have children.

      Defining the monetary unit of account is basic to government under the rule of law, a sine qua non. Thus in the US one of the first acts of the newly constituted republic was the Coinage Act of 1792. Back when we had the rule of law, or at least some semblance of it.

      I am not what anyone would call a collectivist by any stretch, but I think we all have a responsibility to establish and maintain a law abiding government, for our own sake and our neighbors’ as well. A law abiding government would be naturally limited, but it wouldn’t be anarchy and I frankly don’t believe anarchy is even possible except in the most horrific sense. Utopian visions of anarchy are just that: utopian.

      This may be a bit beyond the scope of your comment, and I don’t mean to cast any aspersions on you or even freegolders generally. People see things differently. This is the way I see it.

    • But just to get a little more specific for a minute, Wil, the Coinage Act of 1792 was a law. Such laws, defining the monetary unit of account, are in no sense “artificial”. I have described it elsewhere as the first obligation of government. To the idea of government, defining the monetary unit of account is the most natural thing in the world, so much so that a failure or refusal to do that is the collapse of government under the rule of law.

      The “international trade balancing and settling purpose” of gold is not undermined but rather enhanced by having the monetary unit defined in gold terms. The monetary unit at that point is simply a proxy for gold, but in readily understood quantities through a convention established by law.

      I don’t want to “cap” the free market price of gold, because if the dollar is defined by law in gold terms there will be no market at all, free or otherwise, trading dollars for gold. What would be the point? Unless, I suppose, people think the redeemability promise is a sham. In any case, in this completely different monetary/legal world the cap is primarily to prevent the further devaluation of the dollar. 30,000 of them to an ounce is already somewhat ridiculous, and from what I know that would be about the minimum, covering only FRN’s outstanding and bank deposits. There’s a good chance that people will decide or want to cover other things, which would make the dollar price of gold even higher. Also, there’s the problem of people piling into FRN’s and bank accounts beforehand, which my initial feeling is that there’s nothing you can really do about that, so that would jack up the price as well.

      It is not easy to sort through all the aspects and consequences of this jubilee/gold redeemability thing. But I’m convinced it’s the only way out of the mess we are in, worldwide.

  4. danny

    Isn’t this kind of control which has created today’s issues. Would it not be easier to return to gold standard and let the chips fall where they may?

    Why cap anything, as you said, mining gold will be profitable until it isn’t. I keep telling my friends, if free markets were an issue we would be talking about the lack of oranges, but we are not.

    I agree with debt default, not debt jubilee. You are rewarding irresponsibility and punishing some responsible. Letting the market sort itself is fair and will fix the debt issue. Those who took loans they cannot pay will default, and those who lent to them will lose their money. A debt jubilee merely transfers wealth around, and takes from some that did not cause the issue, while giving to some who did cause the issue. Not fair at all. The system is built on trust, why would I trust a system that just wiped me out? Putting the law breakers in jail builds trust in the system.

    Many will argue the gold item, especially the hacks at NC, but that is the choice of markets, not the choice of a few with an agenda. Some people read books and theories and fall in love with the description of a perfect state. Marx was dreamer, who failed to see the most simple thing, that humans are greedy by instinct. Marx confuses greed as something bad, but he neglected to see the different types of greed. Greed of saving for the benefit of your loved ones, while following the laws and being ethical is not necessarily a bad thing.

    And this goes beyond right or wrong, humans need a motivator to produce. I will go on record stating that humans prefer “free” things than producing for the benefit of others. You can create any theory you want, but this is the truth.

    People always think that what they think is good for society, is what really is good for society. How a few think they know better than the markets is a shock to me. They come up with extensive theories. All of these theories suffer a basic weakness, they all begin with a eleven tt e now better than markets.

    • >>Would it not be easier to return to gold standard and let the chips fall where they may?<<

      Utterly impossible, from a practical standpoint. You have to think this through and it is not easy. Without the jubilee, the gold price required to cover all the outstanding dollars would be so high it could never actually happen.

      Let me put it to you this way: government got us into this mess; and the government – through its most fundamental law, the constitution – will have to get us out. Fortunately, people acting as a group can amend the constitution.

      Why cap anything, as you said, mining gold will be profitable until it isn’t.

      All you’re capping is the dollar definition of gold. As I have said elsewhere, the government must define its monetary unit of account – in the case of the US, the “dollar”. It would be quite a fundamental confusion to regard this as some sort of government interference with a free market.

      It’s really no different from other weights and measures like quarts or liters. Only when it comes to money can governments refuse to define the unit of account, and as you can see this is not good for freedom or economic prosperity or even stability.

      I agree with debt default, not debt jubilee. You are rewarding irresponsibility and punishing some responsible. Letting the market sort itself is fair and will fix the debt issue.

      So much irresponsibility has been rewarded at this point that what I am proposing is a trifle, not to mention that the jubilee will have salutary effects, not pernicious ones. And a jubilee “punishes” no one. That’s the whole idea of it.

      Lastly, the “market” cannot sort this out. For just one example, people are evicted from their homes by the government. By force. Throw that into your “free market” analysis.

      How a few think they know better than the markets is a shock to me.

      The “market” is not some thinking, breathing entity. It is not God, it is not infallible, and it certainly does not exist apart from some agreed upon set of rules that are observed the vast majority of the time. Principal among these are the definition of monetary units of account, such as the dollar.

      Appreciate your comment, but it’s kind of way off into purely ideological “free market” orthodoxy, which does not take into account that “free” is a relative term, not an absolute one.

      • danny

        Who said anything about paying all debts. The US has enough gold to pay for all outstanding sovereign debt (us does not have to pay all debts now, just make use redeemable for gold) and renegotiate all other debts and contracts. The value of the dollar to gold doesn’t even matter, let the usd float vs gold.

        You are wrong, the gov cannot cap a price, as it may be too low or too high and causing dislocations. Ending frl is much more important.

        With regards to the eviction comment, for every single dollar you issue, a dollar is removed from somewhere else. You double the money supply, nothing changes, as prices rice. So who knows, perhaps a senior that has saved all his life will be evicted from his home when he has to stop paying his mortgage to buy a loaf of bread for 3000 dollars.

        You missed the biggest point, we need more food, clothing, housing, not more pieces of paper.

        How is free market relative?

        We have laws, don’t we? Enforce the laws.

        How about not bailing out the tbtf banks.
        The gov creates a bunch of legislation to “help”, and end up creating dislocation and we end up with higher costs, like education. End those too.

        We focus so much in “helping” that we don’t even look at the effects of our actions.

        Socialism is what does not work. Only a farmer can care for his cattle appropriately and with the highest benefit to society. Let the farmer have his cattle. For taking it from him likely means no more cattle in the future. Oh, on last thing, nothing is free. Again, for every penny you bring into existence, a penny is diluted somewhere else.

        • Danny, if you think any of this is “socialism” you’re very much mistaken. What you should try to grasp is that there is no “free” market without the law. But the law, ironically, always limits freedom, at least in the sense that some actions are proscribed and/or punished or penalized.

          The law has a lot to say about money, but it should always, at a minimum, define the unit of account. In the case of a gold standard, that would mean that the price of gold would be fixed by law in terms of the unit of account purely as a matter of defining the latter, the same way quantities of liquid and measures of distance are fixed. This is not socialism. Far from it.

          With regard to the jubilee idea, it has become necessary because for too long the law has abandoned its obligation to define its monetary unit of account, so that now there are endless social obligations denominated in dollar terms that not only cannot be met but cannot even be properly quantified and defined. To say that the law has to fix this problem is no more than to acknowledge its role and the error in refusing to adhere to it. Our “economic crisis” is in fact a crisis of the law brought about by neglect at many levels, from the banksters to the so-called rulers to the citizenry itself. Blame is so widespread that there is no way to affix it to any one person or entity. And the best way to address THAT kind of problem is to extend forgiveness across the board and start over from where we are.

          This is not socialism. This is self-government under the rule of law.

          • danny

            My father used to think I could make a good lawyer, perhaps due to my hard head. Who knows more precisely what the price of oranges should be, the market or a few government puppets?

            In terms of unit of account, has the fed not attempted to set the right cost of money and risk for the last 100 years. Your proposal does not change the fact that a group of people, with biases, would decide these things. The issue is not the system itself, but the biases and conflict of interest the ones in power have.

            For instance, the fed is owned by banks, is it a surprise that their actions benefit the banks?

            The gov puppets get to be in office by getting voters to vote. Do you know which group of people tend to organize and vote for a party collectively? Unions???

            So you see, the rich have their defender, so does the government entitled class. Who defends the majority?

            I have a proposal, let us all compete against each other. We, the middle class, are the majority and should be asking for fair game at the top of our lungs.

            • Again, “free market” talk is confusing you. When there is no definition of the monetary unit of account – it “floats” – then the discretion of the fed to “set the right cost of money” is unrestricted by any real thing, and they can truly become central planners.

              Through defining the unit of account by law the fed is shackled. They may have their biases and conflicts, but they would not be able to implement them, at least not as they are able to do now. Equating the setting of interest rates in a purely fiat money environment with setting the definition of the dollar by law is turning everything on its head. The two are essentially opposites in reality. Regarding a thing as being the same as its opposite is the most fundamental intellectual error, like contradicting yourself.

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