November 01, 2012

Hurricane Sandy And The Environment

And the warning about global warming and more such severe weather to come.

By Melvin J. Howard

We now know that you and I don't just go out and make money when we go to work or sell something. Instead we are just getting a transfer of already existing money from people that have some. Unless these people or companies are a bank then they didn't make money either - they also got a transfer of some money that already existed. Money, you will recall, is just the other-side, the mirror image, of debt. Money is created by the creation of a corresponding amount of debt. Money, in its most basic and spendable (or liquid) form, is created by banks making loans to the non-bank public.

Maybe your money started its life as funding for a dam or mining project, and here you are with it today. Maybe it even started off as the funding for that logging project that caused your favourite forest to be clear-cut and which caused you so much distress. That seems like money some of us might not like very much. Before I even ventured into the outback I really never knew what was all the fuss about? Global warming, carbon pollutants, clear-cutting, recycling. I didn’t care much as long as it didn’t affect me in the City but slowly I found that it did it effects all of us. So lets look at exactly what purposes money is being created for and then we'll have a better idea of the history of the money we are spending today.

If you go to the web site of the Federal Deposit Insurance Corporation bulletin at Total assets of commercial banks at year-end 2000 are $6.2 trillion dollars. Savings Institutions have total year end 2000 assets of $1.2 trillion. Here is an interesting way to look at this data. Adding up the total Commercial Banks and Savings Institution Assets would give a total of $7.4 trillion in bank assets. This is, of course, debt of the non-bank public (that’s us) owed to the banks this is in the form of mortgage, credit card debt and so-forth. The way that money works this should mean that the total money supply in US dollars (that is the money that we non-banks can use in the trade for all goods and services) should be close to this $7.4 trillion in bank assets. At the end of 2000, this is $7.2 trillion, which is only 2% off the total bank assets or debt owed by the public to the banks. 

Let's just focus on Commercial Banks since that’s where most money (almost 85%) is being created. This total balance sheet of the commercial banks gives us the breakdown of how today’s available bank money was created. We see that $3.8 trillion, or 60% of it, is created as "Loans and Leases". The rest was created for other assets owned by the banks such as investment securities and bank real estate. So let’s drill down into these "Loans and Leases" since they make up most of the money that’s been created. You will see a breakdown of how this $3.8 trillion dollars was created. Almost 50% was created for real estate purposes, mostly mortgages for residential and commercial real estate purchases and development. Another 30% is for commercial and industrial project purposes. And most of the rest is loans to individuals, in the form of Credit Card and other personal debt. 

Combining this information we can see that almost half of the money created by banks comes into existence for some kind of real estate transaction, commercial or industrial project. We can extrapolate and say that about half the money we use today came into existence for the purpose of some kind of Land Alteration and its associated natural resources. This means the replacement of natural land with some kind of human development. The US dollar based monetary system including the G-20 nations, as we know it today is heavily dependent for its survival on human alteration of the natural landscape and it's resources.

Let’s go green

Nature has figured out some excellent ways to moderate the flow of water to manage flood and drought risk and also to clean water so that the waste of one process can get all cleaned up and ready for another process. This all happens through water's interaction with the land and with the ultimate Central Banker - the Central Banker of Energy, the Sun. Humans have absolutely no control over the Energy Central Banker. All they can control is the things that store the sun's energy like plants and animals that eat plants, and also they can go find the sources of other stored solar energy in the form of old squashed dead plants and animals, called oil and coal. All these activities plus all of the human monetary-system driven development of land effect the land on earth, not the Energy Central Banker. So the land is what we focus on in considering the link between the water cycle and the money cycle that forms the basis of our economy. The way that nature manages flood and drought risk is really through plants and soils which are, of course, the very best of friends - the soils being largely made up of decaying leaves and trees, and the plants needing the soils for food. The soils store lots of the rain as groundwater and they are kept in place by tree roots. Some of this water the trees might like for later when they get a bit thirsty, and other ground water might fall to an underground aquifer or run off slowly into a stream in the watershed.

Having lots of plants and rich soils in a watershed means that when there is lots of rain the ground will soak up lots of the excess water and this will help mitigate flood risk. When it's been a long time between rains you can rely on the groundwater in the aquifer or the groundwater gradually seeping into a nearby stream to provide a steady flow of water from earlier rains. This helps mitigate drought risk.

As for natures water cleansing functions the trees keeping the soils in place prevent excessive amounts of mud, clay, sand and salt from sliding into the stream. The soils and the little microorganisms living in them are very fond of waste products that most other living things would find rather unappetizing. Them and other little critters living in or near the stream often perform water cleaning and filtering functions that help to make the water useable for others. The trees sweat off some water through evapo-transpiration helping to cool the stream area so that all the critters that live there that have an important role in the water cycle can stay at a nice temperature to do all their work. Having such a water cycle on our planet makes a lot of sense given that gravity would otherwise drain all the water to the salty sea and sea-water is not very drinkable. This whole business of evaporation and rainfall to replenish all living things that need fresh water is quite sensible and, of course, life as we know it would not exist without an efficient water cycle. A prosperous human society cannot exist without an efficient water cycle. There's that efficiency word that people would have us believe that only markets can provide. There number of ways to describe efficiency but lets just talk about efficiency in plain language that makes sense intuitively. At the end of the day markets and the monetary system are all about allocating energy amongst the different participants of a society - whether that energy be in the form of labor applied to a raw good to make it into a product, the raw good itself such as food crops, or stored energy such as coal and oil. And we know that all our energy comes from the sun and that only plants know how to capture and store that energy directly. All these being the processes of Mother Nature they obey what we humans have interpreted to be the natural laws of physics, most especially they obey two important energy laws - the First and Second laws of Thermodynamics - that have never ever found to be violated by any process. Water obeys these natural laws. Money, being a purely human abstraction, does not.

The First Law of Thermodynamics is the Law of Conservation of Energy. This says that the amount of energy in the universe is fixed and you can’t create new energy or destroy existing energy. When it comes to the planet Earth, we get new energy to the earth from another source in the universe, called the Sun. Apart from all the energy that we have stored in and on earth and the daily dose of sunlight we have no other energy available to us. This is perhaps the primary reason humans have seen fit to develop markets - that is, to allocate this scarce resource of energy.

If the laws of Thermodynamics had just stopped there, all would be right with the world! Under the conservation of energy I could just fill my car with gas, stick a little collector in the exhaust pipe and recycle all the energy I just used and fill my car back up, since I know that energy will be conserved. I only ever have to buy one tank of gas in my life. Buy one load of electricity to heat my home for my whole life Id just recycle everything over and over. Energy companies would go bankrupt, there would be no wars in the Middle East, and the stock market would collapse because no-one could make money from selling energy.

OK there’s a catch. And that’s the very important Second Law of Thermodynamics. The ENTROPY Law. The law that sits right at the heart of the conflict between man and nature. ENTROPY is a measure of disorder in terms of the usefulness of energy. Low entropy means very useful energy. High entropy means quite useless energy cant use it for another process, its not organized enough. The Second Law of Thermodynamics says that Entropy always increases as energy is used. Therefore, once you have used all the gas in your tank, even though the driving process left the same amount of energy from the gas in the world, that energy has become pretty useless so that you cant re-use it. This law then really creates the scarcity of energy and the primary motivation for using markets to allocate it.

Some economists tell us that this will be done most efficiently if the conditions of a free market are met. Presumably this means energy will be distributed more efficiently since that ultimately is what the market is distributing. So how does the market deal with the Entropy Law? The answer to that would be Not at all! While it is true that the Entropy Law contributes greatly to the scarcity that gives rise to the need for markets you will not find the Entropy Law mentioned in mainstream economics textbooks. Modern money and capital markets, and contemporary economics have been built up IGNORING the most fundamental laws of nature. It is interesting to consider who runs things most efficiently - the Markets or Mother Nature? Given that the most desirable outcome of the water cycle, even from a human-centered point of view, is a stable, secure flow of clean water one would have to conclude that Mother Nature arranges the most efficient allocation of energy, for, in the natural processes there are no waste products, and solar energy is used to its maximum. Every player in the natural water cycle does some work in the water cycle and various related nutrient cycles and their waste products get used as input into some other process in these cycles. Nothing is wasted and everything fits together to form a whole cycle that has evolved over millions of years and that we are the beneficiaries of today. Nature's water cycle seems to have taken the Entropy law into consideration and then optimized energy use within this boundary condition.

Enter Man

But then we Humans come along with fears of scarcity, markets and a monetary system that ultimately depends on alteration of the land for its survival and for the survival of the markets. But most alterations to the natural landscape then disturb Mother Nature's maximally energy efficient water cycle in several common ways. These are common things that have happened all across the globe:
  • First, deforestation exposes soils and causes soils, sediment and salt to rush into the stream at the next rainfall. You end up with salty water and/or sediment that kills off lots of the plants and critters that had important roles in the water cycle such as water filtration.
  • Second, the loss of soil and vegetation, coupled with impervious surface coverage such as roads, car-parks and buildings means that water can no longer seep into the ground as is very important in mitigating flood and drought risk. The frequency of flood and drought increases.
  • Human activity in watersheds (real estate, mining, logging, intense farming and so forth) and the loss of filtering systems through the loss of vegetation and soils means more and more pollutants are entering the water sources.
  • The practice of building dams either for hydropower or for storing water in a place that doesn't have enough, and the practice of channelling water to places that don't have much, has been responsible for massive loss of aquatic life, flooding and drastic alteration to affected watersheds and local water cycles.
Then we market-oriented humans come along and say, "Now we have a water problem. Let's use some market mechanisms to fix it." In fact a lot of the market-oriented people go so far as to say - "Let's privatize the water - they think that this pure market solution will fix everything can you believe this? " And they say this perhaps forgetting that it was market forces that got us into this problem in the first place.

All this is not to say that us humans should not have markets for other things or should not alter the land. Rather it is a wake up call to build a much better world and make more efficient use of our energy. Ultimately this would mean a paradigm shift in the way land is developed so as to retain enough natural resources for million of years to come. If we do these functions right it would enter into the economy at the point of credit creation, or equivalently money origination think about it. “That’s why I am green.”

October 24, 2012

Medical Directives

Doctor’s orders
By Melvin J. Howard

Plato the Classical Greek philosopher and mathematician, student of Socrates. Mused that insofar as we are all restricted in this human body and by the conditions of life here on earth we are unable to attain true wisdom or nirvana. And we can only attain true fundamental wisdom through the pure soul and that is obtained when we are released completely from the limitations of the human body. And this is the true equalizer of all mankind "death". But what if you don’t go away gently in to that far night right away? Yet you become incapacitated mentally or physically for some reason what then? That’s when you need a directive a medical directive. An Advance Medical Directive or Advance Health Care Directive also called a Medical Power of Attorney or even sometimes it is even referred to as an Designation of Health Care Surrogate, allows you to designate a health care agent to make medical decisions for you if, for any reason, you are unable to make them for yourself. It can also be used to designate someone to serve as your guardian or conservator in the event a court determines that you have become mentally incapacitated.

If you have a trust-based estate plan, then your Last Will and Testament will only be used as a safety net to catch assets that you did not transfer into your trust prior to your death and put them in there after your death. This type of will is referred to as a Pour Over Will and contains minimal instructions since your Revocable Trust is the main document governing your estate plan.

What is a trust?

A trust is a legal relationship which is created when a person transfers property to a trustee with the understanding that the trustee will manage the property for the benefit of one or more beneficiaries. We use the term “property” here in its broadest sense; it includes both real property—such as land and buildings—and personal property—such as bank accounts, stocks and bonds, and personal effects. The person who transfers the property to the trustee is called a trustmaker (also known as a settlor, grantor, or trustor). In the typical revocable living trust scenario, the trustmaker is also the (or a) trustee and initial beneficiary of the trust. The written agreement between the trustmaker and the trustee is called the trust instrument.

What is the difference between a revocable trust and an irrevocable trust?

If the trust instrument says that the trustmaker can revoke the trust or change the trust instrument, the trust is what we call a revocable trust. The trustmaker has complete control over a revocable trust. If the trust instrument does not allow the trustmaker to change the trust instrument or revoke the trust, we have what is called an irrevocable trust. Irrevocable trusts allow trustmakers to make gifts but keep the recipients from having complete control over the gifted assets. Trustmakers must give up control over assets that they place in irrevocable trusts.

What is the difference between a living trust and a testamentary trust?

A living trust is one that you create during your lifetime by making a trust agreement with a trustee and transferring assets into the trustee’s name. A testamentary trust, on the other hand, is one that goes into effect and is funded (i.e., assets are transferred to the trustee) following your death. Thus, a revocable living trust is one that you create and fund during your lifetime, and over which you have virtually complete control.

What is probate?

Probate is the court proceeding to transfer a dead person’s assets to the people who are supposed to get them. I have had personal experience in this scenario it is simple in concept, but humbling in practice. Probate can easily take a year or more to complete, and the attorneys’ fees and other costs associated with probate could easily eat up 5% of a decedent’s gross estate. (“Decedent” is lawyer talk for someone who has assumed room temperature i.e., a “dead person.”) If a decedent owned assets located in more than one state or country, it may be necessary to have a probate in each jurisdiction in which assets are located. If one probate is bad, you can bet that more than one probate is worse. In almost every case, probate is an awfully good thing to avoid.

How does a trust help me avoid probate?

Once assets are transferred to the trustee, the trustmaker no longer holds legal title to them—even if the trustmaker and the trustee are the same person. Thus, if the trustmaker dies, the trust continues, and the successor trustee (who is named in the trust instrument) takes over administering the trust. Since a trust can’t die the same way a person can, the trust assets will not be subject to probate upon the trustmaker’s death. Title to the trust assets simply remains in the trust, and the trust instrument tells the successor trustee (i.e., whoever the trust instrument identifies as next in line to serve as trustee) exactly what to do with them.

What is a conservatorship and can it be avoided?

Perhaps even more important than avoiding probate, a revocable living trust can avoid a conservatorship proceeding (sometimes called a “living probate”) in the event the trustmaker becomes incapacitated. Ordinarily, if a person becomes incompetent, a court must appoint a conservator to handle the person’s assets on his or her behalf. The conservator must then account to the court every year or so, and the whole conservatorship process ends up being costly and time consuming and almost always worth avoiding. On the other hand, if the incompetent person’s assets had been held in trust, the successor trustee could have stepped in—without court action—and picked up administration of the trust where the trustmaker left off. Conservatorships can also be avoided by ways of powers of attorney.

What is a power of attorney?

A power of attorney is a document in which give someone else the legal authority to act on your behalf. The agent named in your power of attorney is not a trustee, and your agent will not be held to as high a legal standard as would your trust if the agent were to make a mistake or do something you didn’t like.

Are there different kinds of powers of attorney?

Powers of attorney may be durable or non-durable, springing or evergreen, and general or limited. A durable power of attorney which continues to be effective even if the person who signed it (called the principal) becomes incapacitated. A non-durable power of attorney is revoked upon the principal’s incapacity. All powers of attorney are revoked upon the principal’s death. A springing power of attorney becomes effective upon the occurrence of some even on a date after it is signed. A typical trigger for a springing power of attorney becoming effective is the incapacity of the principal. An evergreen power of attorney, on the other hand, is effective from the moment it is signed until the principal either dies or revokes the power of attorney. A general power of attorney grants the agent broad authority to do just about whatever the principal could do with his or her property, whereas a limited power of attorney grants authority to deal with a particular transaction or subject matter.

What is the estate tax?

The estate tax is a tax on your failure to spend your last nickel at the same time as you exhale your last breath. The tax is imposed on the value of everything you own when you die (including life insurance proceeds and retirement plan death benefits, along with your house and everything else you would expect to be taxed). If you are a U.S. resident, the law gives you an exclusion from the Federal estate tax that enables you to shelter a certain amount of assets from the tax. This shelter, called the “applicable exclusion amount” (formerly known as the “unified credit,” if you are familiar with that terminology).

What are the chances that Congress will repeal the estate tax once and for all?

It is anybody’s guess what will happen to the estate tax, but one thing is for sure. Congress is not done tinkering with the estate tax law. Five years from now, the law will probably be very different from the way it is now, and “the experts” differ over whether the estate tax will ever actually be repealed. Many believe that we will end up with a relatively large applicable exclusion (perhaps $3,500,000; perhaps more), but that the estate tax is here to stay. All we know for sure is that we need to stay tuned for change in this area.

If I have a will, my family won’t have to deal with probate, right?

Having a will does not cause your estate to avoid probate. It may make probate simpler and less expensive, but it does not avoid the necessity of getting a court order for someone to have authority to administer your estate and carry out the terms of your will.

If I have a revocable living trust, do I still need a will?

The trustee of a revocable living trust administers only those assets that were transferred to the trustee. If you own something outside your trust when you die, the only way to get it into your trust after you’re gone (which may be very important if some of your beneficiaries are very young or unable to handle assets themselves), is to have a pourover will. A pourover will simply says, “I meant to put everything into my trust while I was alive; if I missed something, put it in there after I’m gone.” It is much better for you and your family to have all of your things in your trust during your lifetime, but since that doesn’t always happen, a pourover will can be a crucial safety net.

It is often difficult for individuals to think about the care and treatment they want in the event they are incapable of making their own health care decisions. However, completing an Advance Health Care Directive is important for all adults as they may unexpectedly be in a position where they cannot speak for themselves and run their  business and personal affairs, such as in an accident or in cases of severe illness.

October 04, 2012

A Reformation Of American Capitalism

Capitalism With Social Values
By Melvin J. Howard

The Great Depression was basically the same in the United States as other capitalist countries.  High unemployment, lower gross domestic product, and some kind of a government response to the depression were evident in all the capitalist countries. However, the United States took a different approach from the rest of the world powers in their recovery methods during the depression. Herbert Hoover was the president from 1928-1932 and had the first opportunity to publicly combat the depression.  His philosophy was simple when speaking of the American system. “It differs fundamentally from all others in the world.  It is the American system. It is just as definite and positive a political and social system as has ever been developed on earth.  It is founded upon the conception that self-government can be preserved only by decentralization of Government in the State and by fixing local responsibility; but further from this, it is founded upon the social conception that only through ordered liberty, freedom and equal opportunity to the individual will the initiative and enterprise drive the march of progress. This is not what the American people wanted to hear at this time a self sufficient individualism” speech when many families could not even afford to put food on the table.  

Hoover created the Federal Farm Board to try and improve farm prices. This agency would sometimes pay farmers to not grow crops to try and raise demand. As soon as the prices started to show some rebound, farmers would plant crops again against the federal government’s wishes.  The prices would never correct without production and open foreign markets. He closed foreign markets for agricultural products.  In the 1920’s, markets in Europe for grain were tremendous, but because of the tariffs on American goods, many countries could not afford them and turned to other suppliers.

By then the recession had grown into a full-blown depression. Much worse, the depression’s was just getting started. Now it was Franklin D. Roosevelt (FDR’s) turn he was president from 1932 until his death in 1945.                         

He was the next American president that had an opportunity to deal with the depression. “Restoration calls, however, not for changes in ethics alone. This nation asks for action and action now….It can be helped by national planning for and supervision of all forms of transportation and of communications and other utilities which have a definitely public character. FDR and his advisers believed that Hoover had the right idea, but they wanted to do more than just follow Hoover’s lead.  FDR’s first New Deal had two very controversial pieces that tried to stimulate the American economy.  The first one was the National Industrial Recovery Act of 1933.  To try and gather an understanding of this act, here is an excerpt.

To provide for the general welfare by promoting the organization of industry for the purpose of cooperative action among trade groups, to induce and maintain united action of labor and management under adequate governmental sanctions and supervision, and to eliminate unfair competitive markets. This act has some definite socialist overtones.  FDR wanted the federal government to be very involved in the public’s lives.  The Agricultural Adjustment Act was the other controversial piece that basically attempted to collectivize the farming industry to control prices.  This was modeled after Hoover’s FFB, but it had more controls does this sound familiar? 

Both leaders realized that something needed to be done to help the American people.  That has been proven.  Hoover attempted to stimulate the economy with tariffs and FDR attempted to with price and wage controls through the first New Deal.  While evaluating the recovery programs of the two leaders, it is important to keep the American people’s needs at the top of the list.  With that being said, neither leader kept the basic necessities of the American people in mind when trying to fix the depression.  Food, water, shelter, and heat are things that people need to survive.  Fields of crops were being plowed under while people were starving to try and fix low prices.  

History shows that a capitalist economy needs time to crawl out of a depression.  The political divisions like the one we are witnessing now prolonged the depression in the United States until WWII when twelve million men were sent overseas.  Most of the world countries climbed out of the depression sooner than the United States, so, in essence, political economic formulas prolonged the depression in the United States. 

Too much wealth landed in the hands of too few people. An article by Ross L. Finney offered a dire prediction in early 1924: "Unless we shift our weight Western civilization will enjoy an illusive prosperity and greatness for a time, but will then stagger, stumble and eventually collapse" (January 24, 1924).

Some 19 months before the crash of the market, editorials scrutinized the problem of unemployment with a growing sense of urgency. In the face of this "orgy of speculation," editors argued, religion must "protest a social or industrial order in which men wallow in sudden wealth which they have not created while their fellows by the million face want" .The speculation of the capitalist market allowed for an accumulation of "undigested wealth" and the separation of means from ends Wall Street had divorced wealth from activities that led to employment. In addition, machines had invaded the workplace and massively displaced human labor.

This antagonism toward capitalism surfaced regularly after October 1929. Given its socialist sensibilities, there were many people that interpreted the crash of the stock market as an opportunity to begin a new form of capitalisms. People could no longer ignore the growing and devastating problem of unemployment. This awareness opened the door to social solutions most Americans would have rejected as unacceptable only a few years before. Editorials supported legislation designed to account for the unemployed, to establish public works projects to enable their return to work, to provide for newly unemployed through a national unemployment insurance program, and to create a national bureau of unemployment to stay on top of the problem.

The crash of the market also offered Americans the opportunity to reflect on a new understanding of the problem of greed. Americans, said some editorials, have been too quick to condemn racketeering, "the poor boy’s easy road to quick wealth," while ignoring ways "the son of a comfortable home seeks to make his pile and make it quickly". In addition, the country’s obsession with its "standard of living" had to be balanced against the needs of the rest of the world. Standing pat on the traditions under which the present absurd inequities have grown up” would not solve problems like these, concluded. Editors grew impatient with President Hoover’s unwillingness to use federal means to address the social crisis. Hoover urged private charities, and the organizations of local communities where hunger existed, to step up to meet the need. Many people judged the president’s response entirely inadequate. His fear of the dangers associated with the federal "dole," argued editorials, ignored the fact that poverty emerged more from the defects of the system than from the "personal shortcomings of the sufferers.

The depth of the depression demanded a federal response, one that would establish a "permanent deposit of advanced social legislation." Hoover, to the growing dismay of editors, ruled such legislation out of bounds. "How bad must things become," asked one editorial, "before the nation is ready" to enact legislation?  Hoover’s local-community approach would "prove to be not only tragically inefficient but scandalously inequitable". Roosevelt’s landslide victory was a sign that Hoover got it wrong in some people’s eyes. Once elected, and once the extent of his program to deal with the depression became evident, Roosevelt quickly gained enthusiastic endorsement. With 16 million people out of work, editors declared Roosevelt’s "readiness to experiment with new policies his greatest asset and the nation’s greatest ground of hope". As Roosevelt exercised emergency power to deal with the banking crisis, revise the relationship between American currency and gold, and establish the Tennessee Valley Authority, editors hailed the arrival of "a new United States.

Editors interpreted the administration’s orchestration of the national recovery act as a commitment to graft socialistic principles into the American capitalist system.
This philosophy of "socialized capitalism" encouraged the idea that "business exists for the community" instead of "the principle that a business exists for itself, that is, for the profits it can make for its owners. But editorials simultaneously noted that the National Recovery Administration (NRA) depended too much on voluntary compliance. Ultimately, Roosevelt’s new system set no restrictions upon profits. And here it necessarily faltered. "Can human nature which has been so long conditioned by the stimuli of capitalism," discipline itself while still subject to the same stimuli, to the point of curtailing its greed for profits when profits are to be had?"

In addition to anxiety about the overwhelming influence of the profit motive, many also worried about whether the power of labor organizations could develop rapidly enough to counter the autonomous industrial associations. Small businesses also tended to suffer under self-regulation provisions that favored the efficiency of the mass-producing abilities of larger businesses. This weakness surfaced more clearly as time passed. Editors also knew that the extension to the South of NRA codes mandating minimum wages would likely cause displacement of black workers without creating an effective remedy.

At a time when the vast majority of clergy in America disapproved of Roosevelt’s New Deal reforms. By 1937, many aspects of Roosevelt’s New Deal had successfully taken root. Labor gained strength. Legislative checks against the worst abuses of big business seemed securely in place. Social Security provided unemployment and pension insurance. Welfare programs eased the suffering of the poor. Roosevelt’s domestic policy had produced a reformation of American capitalism.

September 29, 2012

The 47% Theory On Free Health Care

I thought we were always 100% in this together.
By Melvin J. Howard

Imagine I am running for the highest office in the free world the President of the United States Of America and you overheard me say in a private meeting to a group of wealthy donors something like this almost half the voters in this country 47 percent believe they are "victims" and expect the government to provide free health care, food, and housing. And then I go on to say of these people, "I'll never convince them that they should take personal responsibility and care for their lives." What would you think? First off you would think I just alienated and pissed off half of the population that I hope to govern one day. Secondly you would think this was a dishonest and unfair general characterization of the people of whom I am referring too. Unless you are a hardcore trained financial quant analysts you will not get how our financial and free market system really works. It is technically to complex.      

Follow me down the rabbit hole we call our financial system and I will show you why. Did you know that as little as 4% of the money in the world exists as paper cash and coins. To put it in another way, for every $100 or its equivalent in any other currency, only about $4 exists as printed-paper notes or coins, while the remaining $96 exists as (just numbers written on papers and computer disks)! If you walk into most bank branches in the world and ask for more than $10,000 in cash, from your own account, they will politely let you know that you will need to give them a few days advance notice so they can get the money ready for you. If you don’t believe me try it. Unless you live in New York City or some other high finance center, you will be unable to get that much cash in physical form if you just show up unannounced to withdraw your account. You would think that most banks would have enough cash to pay off a person who walks in to withdraw just $10,000. But most bank branches can't do that in this world. Why? The money, in physical form, does not exist why not? To answer that question, we will first pursue the issue of what money is. So back we go OK, now, when you go to the ATM cash machine and look at your bank balance and it tells you that you have $1,000 left in your account, what is that $1,000? What is it? Yes, what is it? Don’t just say, “It is money”; you need to define it for me what it is? Imagine I was from another planet and asked you this question. What would you tell me your $1,000 on that ATM slip is? That is the question.

Once you have gone over several possibilities in your mind, here is the answer. The $1,000 is simply a recorded number.  Numbers written on a paper or computer disk you have agreed to it, your bank has agreed to it, and you even agree to use it in a cashless way by paying for things using your ATM card. The $1,000 printed on the ATM slip does not represent any sort of wealth that the bank is keeping for you. It does not, for example, represent the value of diamonds the bank is keeping for you in a safe. The only difference between the $1,000 written on that ATM balance slip and $1,000 you would write on a piece of waste paper is that the one on the ATM slip is on record as having been agreed upon by whomever you bank with. If you took that slip, or your ATM card, to a country or civilization (on Earth) where they don’t share your system, they would look at you as if you were crazy as you tried to buy real goods and services with a piece of plastic or a paper with a number written on it. The point of all this is to show you that the money we use in what you might call the Western civilization of today is 96% imaginary numbers written on invoices, slips, and computer disks, while 4% of it is in paper and coins. That 96% does not exists in the sense that you cannot possibly go anywhere on this world and hold it, touch it. It is nowhere! It physically exists nowhere at all on this planet. You cannot see it, feel it, taste it, or touch it. It doesn't exist! The only reason it works is that we the people have agreed on it and we act in predictable ways when certain numbers are written down for us in our name. Now that we know what 96% of it is, let us see what the remaining 4% is.

The 4% that exists as physical real ‘things’ is not made of gold or anything valuable at all. It is made of funny colored pieces of paper, and cheap alloy coins not worth their own weight in money (they are made cheap so that people don’t profit from melting them into iron).  So what is real, people and people believing on what they can accomplish if they put their minds to it that is real.

Let’s begin with debt, because here lays one key to much of the puzzle we find our self and the economy in today

Healthy vs. unhealthy debt

There is nothing wrong with debt, when used healthily as a tool. But when it arises, as it mostly does, from fear, feeling of lack, and negative self-worth beliefs, then it is a control game being played, a painful one at that. Additionally, what most people don’t know is that debt, in our current civilization’s money system, is designed to collapse for a certain number of its holders I bet you didn't know that did you?

The Medici The Kings of the Renaissance

Before cash money was invented in it’s present form, people used to trade by barter. They would exchange goods and services. Finally, one day, a powerful merchant family such as the Medici family of Italy (powerful merchants and later bankers who ruled through influence between the 13th and 18th century i.e. the Renaissance) said, “We have another way we can do this. We can make promissory notes we shall call money. They are more convenient to carry than goods and gold.” The first paper money worked as follows. A trader would go exchange his or her goods for gold. They then take this gold to deposit it with the Medici, and the Medici write up a paper with their signature and family seal, a paper that would represent the gold that was deposited with them. This paper, upon return to the Medici, would be exchanged into its gold equivalent. That concept is where the gold standard came from.

Now let us look at debt. Imagine that the Medici have just opened up their first bank and announced the new scheme to the traders. So one trader, let us call him Melvin, goes to the Medici and deposits $100 worth of gold. The Medici make up a paper saying that they promise to exchange that paper for $100 worth of gold upon its return (less a banking fee, plus an interest, whatever). Now another person comes by the name of Alan then takes this paper and goes home. Alan can use this paper to buy things, but let us assume he does not. So far, he is the only customer at the Medici’s new bank. Now James, another person, wants to start a new business, a hotel. He has the land and building but needs some pots and pans. He does not have any goods to trade in exchange for pots and pans, but he hears that the Medici is giving “loans”. So James goes to the Medici and asks for a $100 loan. The Medici says they can do that, but James has to pledge his land and building as a security, collateral, in case of default. The Medici makes up money (money that did not exist prior) by writing up a new paper, sign and seal it, and give it to James. The condition is that on return, James has to give back $100 plus $10 interest. Now freeze that right there. Imagine that James and Melvin are the Medici’s only two customers at the time. 

This means that the economy only has two paper notes out there, one with Melvin and one with James. And James has to return his plus $10. Where will James get that $10, unless Melvin comes and rents a room at James’ hotel for $10? The Medici did not print the extra $10! So even if James is hyper-careful with his loan, even if he does not spend it at all but returns it after a year, the $100 intact, it is physically impossible for him to pay the $10 interest. This is because he cannot print the extra $10 money and Melvin does not want to spend his money at the hotel, yet Melvin is the only one with the only other note printed! Do you see the error in this system? Even if James now has goods to trade, he cannot trade them for paper money because there is no more out there and the Medici wants cash money or the collateral. James will have to lose his hotel to the Medici simply because of a paper shortage error. He has the original $100 they gave him because he did not spend it, but he cannot possibly get the $10 they want in addition as interest, because he can't print money nor does the only other person with bank notes want to stay at his hotel and pay cash. His hotel may be highly successful, renting rooms in exchange for goods, but he still would not have the printed paper for $10 that he has signed to give back to the Medici as interest. So his hotel would have to be seized by the bank.

This example shows exactly how our modern civilization’s debt system works. But because there are millions of people playing this game, the players don’t realize there is a problem because only 8% of people are caught by this error (about 8% of all debts are un­payable). And those that are caught by this error think there is something wrong with them the so-called 47% of the U.S. population they never imagine that the system itself is flawed are you getting this have we gone down far in the rabbit hole yet? Debt, by its very nature, in our current financial system, is designed to fail for a certain percentage of the population, no matter how much effort or care they put into it. And it is so simply because there is not enough money created (printed) for the interest requested. The only reason this illusion has managed to run this far is that there are millions of players rotating the money and it looks like it works for most people, which makes the few it doesn't work for look like something is wrong with them and not the system.

Every now and then, when the debt bubble bursts like in 2008 that some become aware of this glitch. As you are about to see next, inappropriate use of debt is a function of control and fear. Unhealthy debt is a product of fear, and a deep-seated belief in not having and not being able to have. And fear is a means of control. Now, let us consider the mortgage game that many of us whether we like or not are playing right now. Mortgage what does that word mean? Where does it come from? Split it up and look at its origins. Mort, mortuary, morgue... do you see the root? Gage, engage. Engaged till death. Why would your house loan be called a name that has its word origins from the words that mean death and engagement? Why those two? Of all the millions of words, why those two?

Nevertheless, the unhealthy type of debt is a function of fear and self-worth issues. Remember, we are not judging anything here. We are merely observing basic facts.  There is nothing wrong with debt, when used as a tool. But when it arises, as it mostly does, from fear and negative self-worth beliefs, then it is a control game being played, a painful one at that. A game we created and continue to create.

The Federal Reserve Banking System began when, in 1914 and after trying to do so unsuccessfully several times before due to opposition when 300 people and banks put together just $100 each and formed the Federal Reserve Banking System. The job of the Chairman of the Fed is to keep the economy going in a certain direction, and he manages that consistently for many years and that is why people find him powerful. The point is, he can and does shape the economy. That is his job. Now, in the minds of most people, the economy is some wild crazy thing. But what if it wasn't wild at all? What if it was very tame and always listened to the boss? The point I am trying to make is this: (1) the Board has proven itself  able to direct the economy with a fairly high degree of accuracy and (2) this proves the economy is under the direction of the Board (otherwise the Board would be powerless and we wouldn't even have it).

Now, and this is very important, the economy only looks to be out of control to those who are finding themselves in it but hurting. Did you get that? This is very important if you are jobless, you will think the economy is bad and out of control, because that is your personal experience. But that is looking at it from the bottom end. If you look at it from the top end, there is hardly any ‘out of control’ going on. And this is why: At the top, at the level where bankers see things, they control exactly how much money is in the system the government has nothing to do with it since the 1914 law), they control the interest rates, the regulate cash deposit reserves (which determine how much credit/debt you are ‘allowed’ to have), and so on. So what part of the economy is a mystery to them? To you, the interest rate is a mystery and can move either way to end up hurting or helping you. But to them they can predict it better than you can predict the weather – because it is they that set up the rate. To you, you don’t even know what the money supply situation is or will be – but they do because they have the power to print the money. Much of the national debt is money ‘owed’ to the Fed. People think that the Chairman of the Fed is tackling some unknown thing and maybe soHowever there isn’t much in the economic equation that is unknown to him simply because where he sits he has all the tools necessary to make sure the plan works  almost as planned (the tools in this case being the Fed system, banks, money press, monetary controls, etc). So just because the economy may look out of control for you, personally, or even for a few million people that are in hard economic times, does not mean that, at the top level, it is out of control at all. The point of the Board, to control the economy this perspective is very important. The truth can look very different indeed depending on what perspective you use to observe it on the right side or the left side of the 47% . So if you think the Fed did not have to step in when they did to save the economy I would love to show you some swampland I am selling. You probably also thought that the U.S. health care system was just fine the way it was too. Well if you did how about I throw in the London Bridge with that piece of swampland. So before you go and make that critical vote remember seriously think about what you are really voting for.

"A democracy cannot be both ignorant and free" - Thomas Jefferson