- What about a balanced budget amendment?
- What about cutting spending?
- What about the national debt?
- What about just ending the Fed?
- What about eliminating fractional reserve banking?
- What about taxes?
- What about the future?
- What about if the dollar fails?
- What about fixing this? Are we too late?
- What about inflation? What is that anyway?
- What about a trillion? How much is that?
What about a balanced budget amendment?
A balanced budget is a great idea. Financially sound states and households must balance their budgets, so why not make the federal government do the same thing? The constitution allows the government to raise money through taxes and borrowing. Most balanced budget amendment proposals only allow funding through taxes except during times of emergency such as war, so a balanced budget amendment does control taxes and spending. However, it does not deal with the monetary system itself.
Bailouts: A balanced budget amendment effectively stops the Fed from monetizing US debt, but could still allow bailouts because the Fed would be able to monetize other debt. Without our amendment, the Fed could monetize debt by purchasing corporate debt or the debt of other countries which would expand the money supply and debase our currency.
Spending: Our amendment would curtail spending by force because it would keep Congress from using the Fed to monetize debt and they would have to exist only on taxes and real borrowing. Both amendments could work together for similar purposes to control the government and protect the citizens.
For more information on this issue, see www.balanceourbudget.com.
What about cutting spending?
Cutting spending is great, but it is only one piece of the puzzle and does not affect our monetary system. Policy can change with the next Congress, so it is not a long term solution. Congress can still tax, borrow and monetize debt to fund spending programs. If Congress can no longer authorize unlimited monies through monetization to fund spending programs, they will only fund those programs which make sense and are needed. The government will get back to doing only those things the private sector can't, won't or shouldn't do.
What about the national debt?
If this amendment is implemented, the government will only be able to borrow real money. The national debt could not be increased as it has been in the recent past because an unlimited amount of real money is not available to be loaned to us. The debt ceiling will only be raised when real money exists to support raising it. Of course, checking spending to reduce the amount of real borrowing needed will also have to be done.
What about just ending the Fed?
The Federal Reserve fulfills several functions, but there are two main powers that negatively affect the economy and the value of the dollar. The first is monetizing debt, the second is manipulation of the discount rate (the rate at which banks can borrow short term funds from the Fed). This amendment eliminates the first power, but not the second. Manipulation of the discount rate causes swings in the economy as we have seen with the recent housing bubble and the Fed's power to do this should also be eliminated.
It is our belief that the passing of this amendment will have a domino effect on financial policy. First, without the ability to monetize, government will have no real reason to keep the Fed around. Second, it will spark the debate over what monetary system is best and whatever transition is made can be accomplished in a controlled and deliberate manner. This amendment will effectively signal the demise of the real power behind the Fed, but will not cause as abrupt a shock to the economy as an outright shutdown would cause.
Lastly, it should be remembered that the Fed is the fourth central bank in our short history. If we end the Fed now, there is nothing stopping a future Congress from implementing another one in years to come. This amendment insures that any such entity would have no power to manipulate the money supply.
What about eliminating fractional reserve banking?
Just how far to go on eliminating or reducing the risk of fractional reserve banking speaks directly to the question of what sort of monetary system should replace the broken one we have now. One of the benefits of this amendment is that it will force that question to be asked because central banking will be unable to mitigate the risk inherent in the low reserve requirements we have today. From a practical standpoint, higher reserve requirements can only be achieved over time, not instantly. The ability to stop monetizing debt, on the other hand, can be accomplished in a single action. Once this is done, the Fed will not be available for bailing out banks (or for providing unlimited funds for Congress). In our opinion, since there will be no incentive for Congress or bankers to accept the risk of low reserves, they will increase them over time by themselves.
What about taxes?
If Congress can create money from nothing, why collect taxes? The dirty little secret is that technically, because they can print money, Congress doesn't really need our taxes, or real borrowing for that matter. Taxes exist for two reasons. First, they are a diversion so citizens don't figure out that Congress has no limit on how much money it can raise out of thin air. The secret to the success of the modern banking system is that it is confusing to the everyday person. Once it is understood, it is easily seen for the fraud that it is.
Secondly, income taxes redistribute wealth. Congress can raise money for the poor by authorizing the Fed to monetize debt, but they can't take money from the wealthy unless they tax them. Of course, monetizing debt hurts everyone through inflation, and because every dollar is devalued equally, those with less money are affected more severely. Inflation is a regressive tax.
Over the years, both parties have increased and reduced taxes by a few percentage points here and there to keep the voters distracted. Congress, on the other hand, has had the Fed to create all the money it wants by monetizing debt, making tax rate changes insignificant by comparison. Inevitably, this strategy catches up to fiat currencies and they become devalued, often to the point of destruction.
What about the future?
How long can this go on? Other than the central banks in existence today which are failing (read anywhere about the current world economic crisis), all central banks that have created money from nothing in the past have eventually failed (See our History of Money and Banking) or looted their population and weakened their countries (England as an example). As long as all debts are paid, the system holds up, but money that is monetized, debases the currency. If something happens to cause a massive default (like the government encouraging home ownership for those who can't afford to pay for a home), the system receives a shock from the default and the economy falters. Eventually, inflation devalues the currency and the citizens are robbed.
In 2010, we borrowed about $0.40 of every dollar we spent and budgets in the future are not closing that gap. When other countries will no longer accept our dollars because of their diminished value, we will bankrupt because we will no longer be able to pay our obligations.
We still have a great country with raw materials, labor, technological know-how, businesses and infrastructure, but we are being strangled by debt. The only thing we need for a sound future is a sound monetary system.
What about if the dollar fails?
In the event of a catastrophic financial failure, inflation goes so high that the dollar/currency becomes essentially worthless. All the savings of the citizens become worthless. Assets still exist. Real value still exists in companies, real property, goods, services, precious metals, people (labor) and so on, but the currency has no value. A new currency will be established to replace the dollar. Old dollars will be traded for the new currency at some unthinkable exchange rate. In November 1923 in Germany, Marks were traded for Rentenmarks at a rate of 1,000,000,000,000 to 1 (one trillion to one). See our History of Money and Banking. But recognize that the dollar is failing slowly; the Dow in gold today is 70% of its 1929 high.
What about fixing this? Are we too late?
No. There are plenty of assets in this rich nation and the plunder through debt is not yet complete. If we stop Congress' ability to print money with nothing backing it, we can stop the theft of our money. Regardless of whether we act today, there will be plenty of pain and suffering before we get out of this mess. The sooner we act, the less pain will be felt, but it is not too late.
What about inflation? What is that anyway?
The first thing we think of when someone mentions inflation is increased prices. However, increased prices are a result of inflation, not the cause. Rather, the best definition of inflation is too much money chasing too few goods. Or to clarify how this works, on any given day there is some number of dollars in the monetary system. On that same day there are a set amount of goods and services available for those dollars to purchase. Monetizing is the process used by the government, through the Fed, that causes an excess of dollars in the system. When people have extra money, they bid up prices for goods. In other words, if the number of dollars is increased without a corresponding increase in the amount of goods and services available (or a corresponding increase in real value), then all that has occurred is that there are more dollars chasing the same number of goods and services. THAT is Inflation. Your money will buy less! The result of inflation is increased prices.
For example, we have said that price increases are a result of inflation. If some goods become more expensive over time and some become less expensive, inflation may not be evident, but when essentially all prices increase, there is no other explanation. In the 1950s, you could buy a week's worth of groceries for $10, a car for $1000, a pack of cigarettes for $0.20 and a gallon of gasoline for $0.25. A stay in a hotel was $2 a night and a hospital stay was $15/day. Clearly, the dollar today has a fraction of the purchasing power it once had. Those increased prices are a result of inflation.
Neither inflation nor deflation* are good for an economy. Both generate uncertainty which causes people to hold off on investment and purchasing decisions because they cannot predict what will happen to their investment. Most economists feel a slow steady rate of inflation is the preferred course. This is because deflation is harder to manage since while decreased prices are acceptable, wages are fairly inelastic in a downward direction, so rather than take that risk, they feel a little inflation is the better course. In our opinion, no inflation or deflation would be the preferred choice and with a better monetary system, we believe it is achievable.
* Deflation here is used in the sense of value being lost in the economy. Deflation is beneficial when considered as the natural decline in the prices of goods as they become less expensive to manufacture through productivity increases.
** Wages being inelastic means that, even though as prices decrease and purchasing power increases, employers cannot easily lower employee wages. What is more likely is that the employer’s business fails because a more competitive business opens down the street paying employees lower wages. They can do this because the lower amount will be adequate since prices of goods and services are lower. The overall economy suffers as displaced workers must find new employment. Deflation in the 1930’s was devastating.
What about a trillion? How much is that?
We all know what a million is. That's something most of us can get our arms around. So what's a trillion?
A million seconds is 12 days. A trillion seconds is 31,700 years.
Put another way, if you made a million dollars a day and for easy math worked 250 days a year, in a year, you'd have $250 million. In 4 years you would have $1 billion. To get a trillion dollars at a million dollars a day, you'd have to work 4,000 years.
Graphically, here's the difference represented by stacks of $100 bills:
|a million dollars||a billion dollars||
a trillion dollars
Yes, those pallets are double stacked