China Will Own Our Banks

In an earlier post I mentioned how China may end up owning Alaskan oil. In the January 21, 2011 edition of the Wall Street Journal there are two interesting articles reporting that--


Industrial & Commercial Bank of China Ltd. on Friday signed an agreement here to acquire a majority stake in Bank of East Asia Ltd.'s U.S. subsidiary, becoming the first state-owned Chinese bank to make an acquisition of a U.S. deposit-taking institution.

And...

Industrial & Commercial Bank of China is becoming the first state-owned Chinese bank to buy a U.S. retail bank. That means Americans could soon see a wave of Chinese financial institutions on U.S. shores (assuming regulators allow the deal to go through).

http://blogs.wsj.com/deals/2011/01/21/why-chinas-icbc-bank-deal-is-important/

Now, imagine the future “bailout” of a failing US bank: The US bank becomes insolvent and is taken over by the Chinese bank. (Remember when giant Washington Mutual was taken over by Chase. Chase stepped up because it was big had lots of money. The Chinese bank could become as big or even bigger than Chase).


The US has not seen the last of failing banks:


There were 157 bank failures in 2010, the highest since 1992 and next year is expected to be worse.

According to Bill Zielinski in a post on “Problem Bank List”:


Banking failures for 2010 were at the highest level since 1992 as 157 financial institutions collapsed, the victims of collapsing real estate prices, a weak economy and poor lending decisions. There are many reasons why 2011 could see another wave of banking failures:

1- Unemployment remains stubbornly high and economic recovery remains subdued.

2- Approximately 25% of homeowners with a mortgage are now underwater and negative equity is a major contributing factor to mortgage default. If prices continue to decline expect another wave of foreclosures resulting in major losses to bank loan portfolios.

3- Home purchases are expected to decline as banks maintain vigorous underwriting standards and buyers wait for prices to stabilize. Banks will also remain conservative due to the risk of recourse losses on loans sold to Fannie Mae and Freddie Mac.

4- Bank balance sheets already hold assets at values in excess of fair market. A further drop in real estate values will further increase losses for both failed and surviving banks.


http://problembanklist.com/bank-failures-in-highest-since-why-next-year-will-be-worse-0272/

Imagine receiving a notice from your local bank that it is now a China-government-owned bank, and that your deposits and loans are held by it. It’s not too far-fetched to see how a Chinese bank could end up holding the mortgage or deed of trust on your home through a simple transfer of documents. Delinquency and default could result in the Chinese bank (i.e., Chinese government) owning residential real estate in the US.

Banking regulations and practices could also change. Requests for new commercial and consumer loans would have to be approved by the new bank. A current complaint is that banks now have money to lend, but simply won’t loan it. The new bank owners could change many things about commercial and private life in America, literally deciding when, to whom and for what to loan money.

It’s interesting but sad to watch as America is gradually indebting itself and its future generations to a foreign government. This really does put our children’s future in the control of others. China’s policies and practices may become our policies and practices. Excessive spending, borrrowing and debt do that.

How will “the people” now complaining about domination and exploitation by “greedy American corporations” react when the US corporations are gone and even more interest payments are sent to China to benefit Chinese stockholders (i.e., the Chinese government)? Will future generations of Americans be able to some day borrow money from the "local" bank to buy their first home?

Stimulating Unemployment and Inflation

The policies of the Obama Administration are continuing to stimulate unemployment, not jobs. Moreover, rampant inflation is coming, a future result of those same policies. There are two very knowledgeable and well-respected economists who explain it quite simply—Dr. Walter Williams and Dr. Thomas Sowell.

The following is condensed from Dr. Walter Williams' July 14, 2010, article “A Failed Obama Hero”—

Let’s look at the failed stimulus program of Obama’s hero, Franklin Delano Roosevelt. The unemployment figures for FDR’s first eight years were: 18 percent in 1935; 14 percent in 1936; by 1938, unemployment was back to 20 percent. The stock market fell nearly 50 percent between August 1937 and March 1938. During the Roosevelt Administration, the top marginal income tax rate was raised at first to 79 percent and then later to 90 percent. In 1941, Roosevelt even proposed a whopping 99.5 percent marginal rate on all incomes over $100,000.

Where do the trillion-plus dollars come from that Congress and President Obama are spending in an effort to stimulate the economy? The only way government can spend a dollar is to tax or borrow it.

In the case of a tax, one should ask what would that taxpayer have done with the dollar had it not been taxed away. He would have spent it on something that would have created a job for someone. If the government hadn’t borrowed the dollar, it might have been invested in some project that would have created a job. When government taxes, borrows and spends, it shifts unemployment from one sector to another. Of course, the sector that benefits tends to be a political favorite of the shifter.

Between 1787 and 1930, our nation has seen both mild and sever economic downturns, sometimes called panics, that have ranged from one to seven years. During that interval, no one considered it to be the business of the federal government to try to get the economy out of a depression because there was no constitutional authority to do so. It took the government to turn what might have been a three- or four-year sharp downturn into a 15-year meltdown.














The following is condensed from Dr. Thomas Sowell’s July 13, 2010, article “Signs of the Times”–

Barack Obama has spent hundreds of billions of dollars of the taxpayers’ money just by using the magic words “stimulus” and “jobs.” It doesn’t matter that the stimulus is not actually stimulating and that the unemployment rate remains up near double-digit levels, despite all the spending and all the rhetoric about jobs.

Not only has all the runaway spending and rapid escalation of the deficit to record levels failed to make any real headway in reducing unemployment, all this money pumped into the economy has also failed to produce inflation [so far].

How can the government pour trillions of dollars into the economy and not even see the price level go up significantly? Economists have long known that it is not just the amount of money, but also the speed with which it circulates, that affects the price level.

The velocity of circulation of money in the American economy has plummeted to its lowest level in half a century. Business are holding on to their money. There should not be any great mystery as to why they don’t invest it.

With the Obama Administration being on an anti-business kick, boasting of putting their foot on some business’ neck, and the President talking about putting his foot on another part of the anatomy, with Congress coming up with more and more red tape, more mandates and more heavy-handed interventions in businesses, why would a business risk money it might not even be able to get back, much less make any money on the deal? Banks have cut back on lending, despite all the billions of dollars that were dumped into them in the name of “stimulus.” Consumers have also cut back on spending.

People don’t know what to expect next from this administration, which seldom lets a month go by without some new anti-business laws, policies or rhetoric. Businesses have no way of knowing what additional costs the politicians in Washington are going to impose, when they are constantly coming up with new bright ideas for imposing more mandates on business.

One of the little noticed signs of what is going on has been the increase in the employment of temporary workers. Businesses have been increasingly meeting their need for labor by hiring temporary workers and working their existing employees overtime instead of hiring new people because temporary workers don’t get health insurance or other benefits, and working existing employees overtime doesn’t add to the cost of their benefits.

There is no free lunch—and the biggest price of all is paid by people who are unemployed because politicians cannot leave the economy alone to recover.

Walter E. Williams was born in Philadelphia in 1936, holds a bachelor’s degree in economics from California State University (1965) and a master’s degree (1967) and doctorate (1972) in economics from the University of California at Los Angeles. In 1980, he joined the faulty of George Mason University in Fairfax, Virginia, and is currently Distinguished Professor of Economics. More than 50 of his publications have appeared in scholarly journals such as Economic Inquiry, American Economic Review and Social Science Quarterly and popular publications such as Reader’s Digest, The Wall Street Journal and Newsweek. He is also the author of several books.

Thomas Sowell was born in North Carolina and grew up in Harlem. He left home early and did not finish high school. Eventually, he joined the Marine Corps and became a photographer in the Korean War. After leaving the service, Thomas Sowell entered Harvard University and studied economics. After graduating magna cum laude from Harvard University (1958), Thomas Sowell went on to receive his master’s in economics from Columbia University (1959) and a doctorate in economics from the University of Chicago (1968). He has published a dozen books, as well as numerous articles and essays. He is a senior fellow at the Hoover Institute in Stanford, California.

Arrogance of Power

The following excerpts are from a column written by Cal Thomas dated September 10, 2009, titled "The Reason for Our Discontent."

Who wrote the following: "We must learn to welcome and not to fear the voices of dissent. We must dare to think about 'unthinkable things' because when things become unthinkable, thinking stops and action becomes mindless."

A "right-wing extremist" didn't write these words, nor did a cable TV or radio talk show host. Sen. J. William Fulbright, the late Arkansas liberal Democratic senator and Bill Clinton mentor, wrote them in his 1966 book, "Arrogance of Power."

The arrogance of power and disdain for average Americans is what fueled much of the dissent expressed in town hall meetings. Growing numbers of people see a small cadre of government, academic and media elites caring nothing about them, except when it comes to their tax dollars. Many, especially those who are conservative and even worse, religious, are viewed by these elites as enemies of progress and sophistication.

In a letter to Henry Lee on Aug. 10, 1824, Thomas Jefferson wrote something that could be applied to the arrogant elites who have caused the rising anger in modern America: "Men by their constitutions are naturally divided into two parties: 1. Those who fear and distrust the people, and wish to draw all powers from them into the hands of the higher classes. 2. Those who identify themselves with the people, have confidence in them, cherish and consider them as the most honest and safe, although not the most wise depository of the public interests—"

The $250,000 "Minimum Wage"

$250,000 will eventually be the new “minimum wage” (as well as the effective “maximum wage” people will limit themselves to-- if the federal government doesn’t).

The Obama administration has claimed that taxes will only increase for that 2% to 5% of the working population earning more than $250,000—increases required in the interests of “fairness.” The current 39% top tax rate is scheduled to rise to 41% under President Obama’s plan. It will likely rise above that during the next few years.

Can taxes be increased so that the government takes 40%, 50%, 75% or even 90% of a person’s property? Of course they can— and they have. Remember, the top rate was more than 70% under Carter, was at 80% under Franklin Roosevelt, and reached 90% under Eisenhower and Kennedy. http://www.ntu.org/main/page.php?PageID=19

Year after year, election after election, politicians always say “the rich” and “the wealthiest” should pay “their fair share” of taxes. What is the "fair share?" Is it the present 39%, or the 70% imposed under Carter, or the 90% imposed under Roosevelt? How about 100%?

The answer depends upon whom you ask— If you ask the person paying that 50% or 90%, the answer is “Taxes are too high.” If you ask the person who is not the target or subject of the higher tax, the answer is “The rich should pay more— they aren’t paying ‘their fair share’.”

What is the purpose of taxation? It could be to pay for essential government projects (whatever “essential” means).

But, if the purpose becomes “economic equality” or another redistribution scheme, then “fairness” requires that incomes eventually become equal—from each according to his abilities to each according to his needs.

Incomes are not equal due to a number of reasons. In the end, “inequality” presupposes that “the rich make too much” or “the poor don’t make enough.”

Confiscatory taxes could equalize income—

If property is taken from the top 5% and redistributed to the benefit of the other 95% (whether by direct payments or through specialized entitlements), incomes will still be disparate unless the money taken from the 5% is enough to raise the 95% to the desired $250,000.

Raising the minimum wage could equalize income—

A law could be passed that simply requires that each “poor” person be paid the same amount as any “rich” person. Why should the minimum wage stop at $15 per hour? Why shouldn’t the minimum yearly wage be $250,000— the same amount made by a “rich” person?

Income could be equalized through a combination of both— by taxing everything over $250,000 and raising everybody else’s income up to $250,000.

An accounting period, perhaps ending on April 15th of each year, would be the date at which books would be balanced to make sure that each person earned no more than $250,000 and that each person was paid no less than $250,000.

And, suppose that somebody made a bad investment so that his income was only $200,000 on April 15th— the deficiency of $50,000 would be corrected by issuance of a government check. Incomes could remain equal at $250,000— regardless of effort, abilities, opportunity, discipline, recklessness or prudence.

Curiously, however, nobody would want to work once his or her income hit $250,000 per year— once the $250,000 ceiling is reached, the worker will take a vacation for the rest of the year (unless forced to work for free at a gulag the rest of the year). Also, there just aren’t enough people earning more than $250,000 to take from to make incomes equal for the rest of us. Perhaps the limit should be reduced to $200,000, or dropped to $150,000 or less until all our incomes can be balanced evenly.

If the economic and taxation policies proposed by President Obama are implemented, given the record deficit spending that would result, in reality the maximum wage and minimum wage should really be about $75,000—

A recent WSJ article “The 2% Illusion— Take everything they earn, and it still won't be enough” is illustrative:

IRS data for 2006 (the most recent year that such tax data are available and a good year for the economy and "the wealthiest 2%") shows that filers with adjusted gross incomes above $200,000 comprised just 7% of all returns. Yet, the "top" taxpayers paid about $522 billion in income taxes, or roughly 62% of all federal individual income receipts. The “richest 1%” paid some $408 billion, or 39.9% of all income tax revenues. This was at the current 39% top income tax rate.

“A tax policy that confiscated 100% of the taxable income of everyone in America earning over $500,000 in 2006 would only have given Congress an extra $1.3 trillion in revenue. That's less than half the 2006 federal budget of $2.7 trillion and looks tiny compared to the more than $4 trillion Congress will spend in fiscal 2010. Even taking every taxable ‘dime’ of everyone earning more than $75,000 in 2006 would have barely yielded enough to cover that $4 trillion.”

http://online.wsj.com/article/SB123561551065378405.html

So, even if the government took every dime over $75,000 of every living taxpayer, there wouldn’t be enough revenue to pay for the government’s existing programs and promises to people now living. Perhaps that’s why the US government borrows today and promises to pay in the future— having our future children continue to pay our bills with their energy and money.

"I will gladly pay you Tuesday for a hamburger today" -- Whimpy

Redistribution -- Part 1 of 4

This is Part 1 of 4 on this subject—the promised “rescue” of families having delinquent mortgages by spending $75,000,000,000 through yet another federal "bail out" over and above the other "bail out" and "stimulus" money to be printed and spent.

When I write here that “The federal government is taking your real estate equity,” you might be thinking “He’s nuts” or “Prove it.” Fair enough, so please follow—

Suppose for the moment that federal government politicians want you to help fund an existing or new project— like the new currently proposed $75,000,000,000 ($75 Billion) “homeowner mortgage foreclosure rescue plan.” It is claimed that the plan will assist between 7 and 9 million people who applied for and received home loans with little or no down payment, and who have not been making their mortgage payments for some reason. (Defaults of these “sub-prime” mortgages appear as threatening liabilities on bank balance sheets).

It can be argued that other taxpayers and responsible homeowners have already paid enough to help delinquent buyers get into their houses and condos and stay there. Consider the “affordable housing” policy of the federal government . . .

The federal policy to provide “affordable housing for all citizens” has been advanced for several decades during both Democratic and Republican administrations through programs such as the Community Reinvestment Act (CRA). Also, the “fractional reserve” scheme of the Federal Reserve (to be discussed in a later posting) has helped facilitate the policy. Fannie Mae and Freddie Mac are quasi-private institutions which encouraged such risky sub-prime loans through assurance that any losses would be covered by the taxpayer.

These programs and policies were utilized to sell houses to people who wouldn’t otherwise qualify to afford them (whether it was a “poor” person buying a modest home, or a working couple trying to get into a more “expensive home,” or a speculator trying to “flip houses”).

President Obama has announced that he intends to enact such a "rescue" into law.

Thus, $75 Billion will be needed immediately to pay the investors and banks holding the mortgages on the houses owned by the people not making their monthly payments. The money needed to fund this new program can’t come from those who have not made their house payments because they have no money or have chosen to not pay.

Those who are in default will be getting a big gift by this program— because somebody else (you) will pay for part of their housing (as well as your own). (We haven’t quite reached the point yet where the government will simply tell the banks they can’t collect the loans at all . . . and can’t get their collateral back, either). You the taxpayer must pay for the “bail out” of these defaulting homeowners. You can voluntarily surrender and give your money to the government by sending in a check (in addition to what you are already paying as income tax, sales tax, real estate taxes, gasoline taxes, vehicle excise taxes, etc., etc.). Or . . .

(Continue to next posting on this subject, Part 2 of 4).

Redistribution -- Part 2 of 4

This is Part 2 of 4 on this subject—the claimed “rescue” of people having delinquent mortgages through a new $75,000,000,000 federal “bailout.”

To fund a new program such as President Obama’s promised “homeowner mortgage foreclosure rescue plan” the federal government must have you pay for it—

The federal government can (a) confiscate your property (whether real estate equity or savings account), or (b) raise your taxes and get your earnings that way, or (c) print more money to pay for the projects, which inflates the amount of spending money in circulation (which in effect dilutes the buying power of the money in your pocket or savings account), or (d) do all of these things.

Overt Confiscation— Open confiscation would not be popular among law abiding, hard working citizens. So this method of taking property is sparingly used, although it has been used in history. There are laws authorizing condemnation (but this “eminent domain” usually requires “just compensation” after “due process”), and laws authorizing civil forfeiture (as where there are violations of “civil laws”) and seizure (for non-payment of taxes), and confiscation claimed under “war powers.” But these don’t endear politicians to the citizens.

Subtle Confiscation— Another federal government method accomplishes confiscation more quietly. It is the printing of fiat money (which is discussed in another posting). The effect is a redistribution of your equity to another person. In fact, if you have been responsibly paying your mortgage over the years, equity in your real estate has already been taken during the last year. Please follow—

Have you noticed that there are a lot more “For Sale” signs in front of homes and condos, but that not many are selling? Have you noticed more “For Rent” and “For Lease” signs lately? Have you noticed that the value of your home or condo has gone down during the last year or so? How did this happen, and what does it mean?

(Continue to next posting on this subject, Part 3 of 4).

Redistribution -- Part 3 of 4

This is Part 3 of 4 on this subject—the proposed “rescue” of people with delinquent mortgages at the expense of other homeowners who have timely paid their mortgages.

Redistribution of Equity— Here’s an illustration of how real estate equity is effectively confiscated and redistributed to others.

Assume that a homeowner bought a house or condo some years ago for $200,000. The bank probably required a 5 or 10 percent down payment, or about $10,000 to $20,000 paid from savings. Suppose that over the years, the owner has been timely paying off the $180,000 loan, and that the house had recently appreciated to about $250,000. Estimate that $150,000 is still owed on the mortgage, meaning that there should be equity of about $100,000.

Under the federal government's “affordable housing” policy, another person could buy a similar $250,000 house or condo for little or no money down. These are called “sub-prime” mortgages because this buyer would not qualify for the same loan as the buyer above, and there is a risk that this buyer will default and walk away because he has invested nothing of substance in the property. (Yet, stockholders, mutual funds and retirement plans owning the banks and holding the mortgages have their capital and savings at risk).

Now assume that for any number of reasons that the “sub-prime” mortgage is currently in default and the bank may have to take the property back. Envision millions of similar situations across the nation. Such properties are dumped on the market for sale in hopes they can be sold before they are foreclosed upon.

But, where will the new buyers come from? Millions who could “qualify” already bought a house for little or nothing down, and banks are reluctant to make any more risky “zero down” loans. So, the asking prices for these houses are lowered in hopes of attracting buyers. After the property sits on the market for a while, the asking price is lowered again. If the properties don’t sell, they may be repossessed by the banks. But what would the banks do with them? Who would the banks sell them to? There are more sellers than buyers.

The values of all houses and condos in the neighborhood are lessened because a property stubbornly listed for more than others in the area would never sell. The true value of any property is determined by a comparison to similar properties in the area.

Meanwhile, the owner who believed he had a $250,000 property with equity of about $100,000 now finds that the “fair market value” has probably diminished to $225,000, $200,000 or $175,000. So, it must be concluded that—

--unsuccessfully trying to provide “affordable housing” for others has cost responsible mortgage payers in the neighborhood $25,000 to $75,000 in lost equity (10 to 30 percent loss); or

--the true growth of equity over the last few years was never that big anyway (so hopefully the property was not re-financed and equity taken out against the inflated value for money to make repairs, pay off credit cards, or pay college tuition); and

--the only way to avoid the “loss” is to not sell the property until the higher values return— if they ever return.

(Continue to next posting on this subject, Part 4 of 4).

Redistribution -- Part 4 of 4

This is Part 4 of 4 and the last on this subject— a hoped-for “rescue” of people with delinquent mortgages by an additional $75,000,000,000 "bailout."

Part 3 discusses how the federal government’s printing of fiat money to fund such a program effectively confiscates one person’s equity in real estate and redistributes it to another.

Continuing, there are two additional ways in which the taxpayer pays:

Higher Taxes— On top of the involuntary loss of real estate equity (through confiscation and redistribution) for that troubled “affordable housing” program, there will now be higher taxes to pay to help fund the new “homeowner mortgage foreclosure rescue plan.” Some of the $75 Billion in promised spending to try to correct the problem will come from taxes, diminishing the net income of each earning taxpayer.

Inflation— Inflation is discussed in other posts. But in short, the $75,000,000,000 to be printed and paid out immediately under the “homeowner mortgage foreclosure rescue plan” means that there will be that much more money circulating in the economy. The $75 Billion is not backed by the production of something of value, but is created from “thin air.”

The additional $75,000,000,000 will be competing with your now existing dollars.

As an illustration (using “small” round numbers to keep it simple), assume there is now $150 Billion of spending money in circulation, some of which may be in your savings account. Soon the federal government is going to print another $75 Billion out of thin air (not backed by any new assets or other things of value— no roads have been built, no bridges erected, no crops produced for the $75 Billion). Thus, there will be $225 Billion in circulation to buy, trade or exchange for the same things or services now existing. Prices of existing products and services will rise, perhaps costing three times as much. Or, stated another way, the purchasing power of the dollar in the savings account has lost a third its value.

Inflation is a form of taxation. Instead of overtly taxing the population $75 Billion, the federal government accomplishes the same thing by diluting the value of the dollar. I.e., for this new program, the government politicians in effect take the $75 Billion from everybody’s cumulative savings accounts or 401(k) plans or IRAs by diluting their value by 33%.

So, that’s why I write here that the federal government has taken some of your property and transferred it to others . . . and continues to do so through subtle confiscation, higher taxes and inflation.

May I suggest reading . . .

Adams, Charles, For Good and Evil (The Impact of Taxes on the Course of Civilization), Madison Books (1993)

Folsom, Burton, Jr., New Deal or Raw Deal? (How FDR’s Economic Legacy Has Damaged America), Simon & Schuster (2008)

Parkinson, C. Northcote, The Law and the Profits, Houghton (1960)

Shales, Amity, The Forgotten Man (A New History of the Great Depression), Harper (2007)

Sowell, Thomas, Basic Economics (A Common Sense Guide to the Economy), Perseus Books (2007)

White, Andres Dickson, Fiat Inflation in France (1876)

Woods, Thomas E., Jr., Meltdown (A Free-Market Look at Why the Stock Market Collapsed, The Economy Tanked, and Government Bailouts Will Make Things Worse), Regnery (2009)

Bailout -vs- Bankruptcy

Thomas E. Woods Jr. has just written a book called "Meltdown" (February 2009). It's very current and includes facts and sources after the election of President Obama in November 2008. The $800,000,000,000 "stimulus package" (passed just a couple of days ago) was anticipated. "Meltdown" is so well-written that I'll probably refer to it in future posts.

But this week the automobile companies were back in front of Congress begging for more money. Woods has written about letting big companies go bankrupt. I found the following passages succinct--

". . . the idea of bankruptcy should not be so unthinkable as the Fed and the Treasury consider it. A firm doesn't disappear when it declares bankruptcy. Its capital equipment and its assets continue to exist. But they pass out of the hands of those who have failed to employ them in ways that best satisfy the public, and into the hands of those more likely to do a capable job. If they in turn should fail, these assets will pass into the possession of still other owners."

". . . these firms we're told are too big to fail are in fact too big to be kept alive. The longer they are kept on life support, the more they drain capital and resources away from fundamentally sound firms that could put those resources to much more productive use from consumers' point of view. Keeping such firms alive via government bailouts discourages rather than encourages capital formation and economic recovery."

All my adult life I've been loyal to Ford and General Motors automobiles, wanting to "support the US." Yet for the last 40-50 years I've watched these companies fail to match the products of other manufacturers. No doubt union contracts and expenses have hampered them. But to force the US taxpayer to subsidize these auto manufacturers will only reward incompetence and delay the inevitable while increasing the national debt. (I also object to "bailing out" big banks . . . as well as state governments which are starting to salivate for federal funds).

Fiat Money Inflation in France - Part 3 of 3

This is Part 3 of the summary of Andrew Dickson White's essay Fiat Money Inflation in France (1876).


Recall how France was deeply in debt and the national treasury was empty in the late 1780s, and how in 1789 King Louis XVI tried to stop the people's "National Assembly," which led to the storming of the Bastille (1789) and overthrow of the king and queen and execution by guillotine (1793).

How Fiat Money Came About-- In 1789 France was "financially embarrassed." It was heavily in debt and had a serious deficit. Capital (savings) had retired out of sight as citizens and investors were not confident enough in the economy to take business and investing risks.

There was a general search for some short road to prosperity. Most of the politicians figured the solution would be to get more spending money circulating. They called for an issuance of irredeemable paper money.

By "irredeemable" it was meant that there would be no gold or similar assets in the national treasury to give "value" to the assignats (paper money). In other words, a citizen accepting the paper money would not be able to redeem it (i.e. trade it in) for gold. History has shown that people are justly skeptical about accepting mere paper money as having any real value.

The government came upon the idea of confiscating the real estate owned by the French Church, which comprised between 25-33% of all realty in France. The new paper money would be "backed" by the confiscated lands. In other words, the assignats were intended to be a form of mortgage-- a note secured by land. The government hoped that the assignats would also be used to purchase the church lands from the government, providing the treasury with money.

To stimulate loyalty and arouse public spirit the portrait of the King was placed in the center of the notes and patriotic legends and emblems surrounded his picture.

The assignats were put into circulation as speedily as possible.

In political speeches it was predicted that "the issue of money would bring strength, abundance and prosperity back into the public treasury, commerce and all branches of industry."

The king issued a proclamation recommending that the French people accept the new money without objection.

"It began to be especially noted that men who had never shown any ability to make or increase fortunes for themselves abounded in brilliant plans for creating and increasing wealth for the country at large. People did not stop to consider that it was the dashing speech of an orator and not the matured judgment of a financial expert."

What the politicians had hoped-- The rationale for issuing the assignats was--

(a) it would give the treasury something to pay out immediately;

(b) once in circulation, the money would stimulate business;

(c) it would give large and small investors a way to invest in real estate; and

(d) a stimulated economy and the proceeds from the sale of real estate would provide the government a way to pay its debts and fund new projects and programs.

The next posts on this subject will discuss what happened after the first issues of fiat money and the consequences and effects. Later parts will also discuss the parallels between the fiat money inflation in France during those ten years (1790s) and current events in the United States with the $160,000,000,000 "stimulus checks" of 2008, and then the authorized $700,000,000,000 TARP "bailout" of 2008, and the impending 2009 "stimulus package" calling for the immediate issuance and circulation of $800,000,000,000 in "new money."

Stamps and "Free" Medical

Some people are clamouring for the federal government to take over health care-- supposedly to reduce the costs. If that were to happen, have you ever wondered whether or not the actual cost of health care will decrease, stay the same, or increase in the future?

There's a pretty simple way to guess how the costs of government-controlled services will rise or fall in the future. (Government costs never fall, by the way. The real issue is how much and how often the increases will occur). Compare them to the cost of a stamp.

Just take a look at the history of the cost of a first class US postage stamp. The federal government runs the US mail and postal service. The US taxpayer subsidizes those services in lots of ways-- as an example, the wages and salaries of postal employees are costs in addition to the postage you pay to mail something, while UPS or Fed Ex employees and truck expenses are paid from the money you pay them to ship something. So, ever-increasing US postage doesn't cover the real costs.

I recall writing a postcard to my sister back in the 1950s. It cost something like 2 or 3 cents to mail postcards. I was one cent short, so I taped an extra penny on the card with the stamps and the postman took care of it. Since then, the cost of postage has steadily climbed.

The U.S. Postal Service has announced that the price of a first class stamp will rise to 44 cents on May 11, 2009. Didn't we just have an increase in stamp prices? Still, even with subsidies the Postal Service lost $2.8 billion in 2008 and, unless the economy turns around, is headed toward much larger losses in 2009. There is no cost control because the taxpayer foots the bill.

Would the federal government likely reduce health care costs, keep them the same, or increase them exponentially? My guess is that the patient's out-of-pocket portion of health costs under a federally-controlled program would likely increase in addition to the increase in the taxes necessarily paid to subsidize the program.

The costs will never stop climbing. Look at the "forever" stamp. You can buy a "forever" stamp now for 42 cents, but the same stamp will cost you 44 cents after May 11. Huh? And how long before a first class forever stamp no longer mails one ounce, but just mails one-half ounce?

If only we could pay today for a medical services tomorrow. Instead, we're demanding services today which our children will pay for tomorrow. (Never mind the likely rationing and decrease in quality, which is another subject).

Real Silver Money

Here's a copy of my letter to the Editor of the Herald (Everett, Washington) which was printed in August 1999 --

August 25, 1999

Dear Editor:

Your editorial of August 25, which declares "pennies no longer make any sense," misses the "critical question." That pennies are virtually worthless makes perfect sense in the light of history. It has been said that those who ignore history are doomed to repeat it. Rising prices do not devalue money, the government does.

You state the government can make a penny for one-eighth of a cent. It follows that the government can also print a ten or twenty dollar bill for a lot less than one dollar. Up until the mid-1960s a dime was made of a measured amount of precious silver. Put ten of those silver dimes on one side of a scale and put a real silver dollar on the other side, and the scale balanced. The one silver dime was equal to one-tenth of the weight of one silver dollar. Back then, a gallon of gasoline cost twenty cents, or two silver dimes. Also, pennies used to be made of real copper, but now they are made of a copper-colored metal alloy, probably from recycled beer and soda cans.

Where twenty copper pennies used to buy a gallon of gasoline in 1964, now it takes 170 fake alloy pennies to buy a gallon. The gallon of gas hasn't changed, only the amount of "money" needed to trade for it, which is now stamped and printed limitlessly out of waste products.

No wonder pennies are thrown away in store parking lots. Counterfeits and fakes are worthless. Eventually, it will take a wheelbarrow full of pennies to buy a gallon of gasoline. This is where our money is headed, which was predicted thirty years ago. Nickels will be the next token to be thrown away, eventually followed by paper dollars. When the government produces a counterfeit coin or dollar and passes it off as eight times more valuable than it really is, it won't be long before today's gallon of gas costs eight times as much.

The "critical question" you missed is "why don't we learn from history?" Does anybody remember the phrase "not worth a Continental dollar" or the stories coming out of depressed Europe where it took a wheelbarrow full of paper money to buy a loaf of bread?

Royce Ferguson
Everett Washington

Fiat Money Inflation in France - Part 2 of 3

This Part 2 continues my summary of Prof. Andrew Dickson White's essay Fiat Money Inflation in France. (It is interesting to note the monetary parallels between France of the 1790s and the United States of today, which is the reason I'm posting this information).

The Historical Background in France--

Among the causes of the French Revolution (1789–1799) were that King Louis XV had fought several wars, and Louis XVI had supported America during its Revolutionary War, bringing France to the edge of bankruptcy. The nation’s debt was outpacing income.

The Estates–General was organized into three estates– the clergy, the nobility, and the rest of France. It was last assembled in 1614. The Estates–General was called to meet by Louis XVI in May 1789. In June, the third estate defiantly adopted the title of National Assembly, or an assembly of “the people.” The King attempted to prevent the meeting by closing the convention hall. The National Assembly moved to a nearby tennis court and agreed to not leave until they had given France a constitution.

Louis XVI proceeded to shut down the assembly. Paris was soon consumed with riots, chaos, and widespread looting. On July 14, 1789, insurgents successfully stormed the Bastille, a prison containing weapons and ammunition. The King and his military supporters backed down.

In August 1789, the National Constituent Assembly abolished the feudal system, sweeping away special privileges previously held by nobles, clergy, towns, provinces, companies and cities. Originally summoned to deal with a financial crisis, by late 1789 the Assembly had focused on other matters and only worsened the deficit. The assemblage debated between forming a republic or a constitutional monarchy.

In 1791, the various groups reached a compromise which left Louis XVI as little more than a figurehead-- he had to swear an oath to the constitution, and a decree declared that retracting the oath, heading an army for the purpose of making war upon the nation, or permitting anyone to do so in his name would amount to de facto abdication. The Legislative Assembly degenerated into chaos in less than a year, leaving an empty treasury behind it.

During the continuing chaos, France engaged in war with neighboring Austria in 1792, mobs stormed the royal palace and slaughtered the Swiss guards, and the King and Queen were imprisoned. Louise XVI was taken to the guillotine and beheaded in 1793, followed by his wife Marie Antoinette a few months later.

When the economy continued to go badly, prices rose and people rioted. New governmental policies became more radical. For example, “The Law of the Maximum” set food prices and led to executions of offenders. The “Committee of Public Safety” became the executive agency of the new revolutionary government, and it was responsible for executing by guillotine an estimated 20,000 people for allegedly supporting the monarchy against the revolution. This “Reign of Terror” prevailed between 1793 and 1794.

Eventually, while the government continued to evolve and falter, the French army under Napoleon Bonaparte suppressed riots in France and secured military victories against France’s neighbors. With that success, Napoleon eventually gained power, and in 1799 he staged a coup and installed the Consulate, which effectively led to his dictatorship, and then eventually to his proclamation as Emperor in 1804. This brought a close to the specifically republican phase of the French Revolution.

It was against this general economic and political background that France suffered hyperinflation through the printing of fiat money—

-- The immediate cause of the French Revolution was the bankrupt state of the public treasury, which forced Louis XVI to call the Estates-General to meet in May 1789;

-- On July 14, 1789, came the storming of the Bastille;

-- The inflation in revolutionary France was begun to pay off debt and finance the budgetary deficit;

-- In April 1790 was the first issue of 400,000,000 livres in paper money, followed by successive new issues;

-- In February 1796, when the machinery, plates and paper for printing fiat money were destroyed, there were 40,000,000,000 livres in circulation, to be displaced by new paper notes at a ratio of 30:1 (i.e., approximately 1,200,000,000,000 livres, i.e., 1.2 trillion livres).

Following Parts of the summary of Fiat Money Inflation in France will particularly discuss how inflation is always falsely hoped to be the “short road to prosperity.”