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The New Practical "Laws"of Global Economics

Why

Taxes are the only tool remaining!


by M a r t i n A, Armstrong former Chairman o f P r i n c e t o n Economics In.t'1, L t d . C o p y r i g h t Nov. 2 6 t h , 2008

One o f t h e h i g h l i g h t s o f my e a r l y c a r e e r was M i l t o n Friedman a t t e n d i n g one o f my l e c t u r e s . At f i r s t I was s u r p r i s e d t h a t such a g r e a t mind would t a k e t h e tne t o cane l i s t e n t o what l had t o say. I was n o t an academic. T was a g l o b a l a n a l y s t and f i x e r - u p p e r J But t h e n I reansmbered t h a t back i n 1953, M i l t o n had argued f o r a f l o a t i n g exchange r a t e system r a t h e r than a f i x e d exchange r a t e system d e s i g n e d a t B r e t t o n Woods d u r i n g 1944. M i l t o n had seen t h e f r e e market f o r c e s a d d i n g t h e checks and b a l a n c e t o keep governments i n l i n e . As o u r c o n v e r s a t i o n p r o g r e s s e d , I r e a l i z e d I was d o i n g what M i l t o n had p r o p o s e d and I was i n t h e f r o n t L i n e s , i n d e e d , i n 1997, I t e s t i f i e d b e f o r e the House Ways S Means Committee on g l o b a l t a x a t i o n a t t h e r e q u e s t o f then Chairman B i l l A r c h e r - When you t e s t i f y b e f o r e C o n g r e s s , t h e y group you i n t o ' p a n e l s w i t h l i k e p e r s o n s . I was p l a c e d on a p a n e l w i t h o t h e r economists who were pure academics. B i l l a p o l o g i z e d f o r t h e g r o u p i n g because t h e r e was j u s t no one q u i t e i n my f i e l d . 1 was n o t t h e o r y , but p r a c t i c e . ! I never met J o h n Maynard Keynes. N e v e r t h e l e s s , as t h e hands-on-guy who j u s t d i d n o t f i t i n t o t h a t i v o r y tower model, T had t o d e a l w i t h r e a l - w o r l d e f f e c t s o f t h e f l o a t i n g exchange r a t e system t h a t was b o r n i n 1971 through a mere t r a d e d i s p u t e u n l i k e B r e t t o n Woods - X b e c m a g l o b e - t r o t t e r r u s h i n g a r o u n d from one c r i s i s t o a n o t h e r . I would meet w i t h c e n t r a l bankers and even l e c t u r e d b e f o r e them i n meetings s u c h as i n P a r i s o r i n T o r o n t o , and was asked t o f l y t o B e i j i n g i n 1997 t o meet w i t h t h e C e n t r a l Bank o f C h i n a d u r i n g t h e A s i a n C u r r e n c y C r i s i s . SO what i had t o o f f e r was a f r o n t row s e a t t h a t few e v e r a c h i e v e d . M i l t o n h e l p e d me a p p r e c i a t e t h e u n i q u e p o s i t i o n I ended up i n - t h e B i r d ' s Eye v i e w o f t h e w o r l d . There was a f i e r c e b a t t l e between t h e t h e o r i e s o f Keynes and F r i e d m a n , i n e f f e c t , Keynes had advocated t h a t government c o u l d s t * * r t h e economy through t h e economic t u r m o i l by m a n i p u l a t i n g i n t e r e s t r a t e s and t a x e s whereas Friedman argued government c o u l d n e v e r s t e e r t h e c a r and a t b e s t t h e k s y r e s i d e d i n t h e q u a n t i t y o f money. T h i s b a t t l e raged between t h e 1950s through.the 1970s. M i l t o n was j o i n e d by K a r l Brunner and A l l a n M e l t z e r , who became known as t h e " m o n e t a r i s t s ' t h a t were a t f i r s t t r e a t e d w i t h d i s d a i n . But t h e "ore o f t h e m o n e t a r i s t s t h e o r y was d e e p l y r o o t e d i n the t h e o r i e s o f John L o c k e (1632-1704), D a v i d Hume (1711-1776), J o h n S t u a r t M i l l (1806-1873*, and D a v i d R i c a r d o (1772-11833) E v e n t u a l l y , d u r i n g t h e C a r t e r A d m i n i s t r a t i o n o f t h e l a t e 1970s, Congress o r d e r e d t h e F e d e r a l R e s e r v e t o t a k e t h e m o n e t a r i s t arguments s e r i o u s l y .
1 :

I d i d n o t s e t o u t w i t h a b u r n i n g d e s i r e t o be an academic. Nor d i d I seek a j o u r n e y t o change t h e l a w s o f economics. I was an a n a l y s t s e e k i n g o n l y p r a c t i c a l answers t o be a b l e t o cope w i t h t h e w o r l d and u n d e r s t a n d investment. B e f o r e f a x machines, t h e a n a l y s i s I produced was d e l i v e r e d by Western Union v i a t e l e x and i n t h e e a r l y 1980s, s e n d i n g j u s t one t e l e x on one market c o s t

$5y ttna\enniyaie"ea^
group i n c l u d i n g p r e v i o u s m e t a l s , s t o c k Indexes, and a l l major c u r r e n c i e s . The c o s t t o t a k e a l l t h e s u b s c r i p t i o n s c o u l d e x c e e d $200,000 j u s t i n t e l e x f e e s t h a t a d j u s t e d f o r i n f l a t i o n i n 20D6 d o l l a r s would be - $2 m i l l i o n . So t h e a u d i e n c e j u s t happened t o be the major i n s t i t u t i o n s and government around t h e w o r l d . By s h e e r chance, what emerged was a i n c r e d i b l e o p p o r t u n i t y t o see l i k e Adam Smith t h e r e a l movers and s h a k e r s . F i n a l l y , i n 1935, I d e c i d e d t o open o u r f i r s t o f f i c e o u t s i d e o f t h e U n i t e d S t a t e s i n London. The r e a s o n i n g was t h a t i f T c o u l d send j u s t one t e l e x t o London and then a l l o w them to r e d i s t r i b u t e from t h a t p o i n t , t h e c o s t s Hnild d e c l i n e and we c o u l d expand o u r c l i e n t b a s e i n t o t h e l e s s o r m i d d l e c l a s s o f c o r p o r a t i o n s , I met w i t h t h e head o f a major Swiss bank i n Geneva. We had become f r i e n d s and I t r u s t e d h i s a d v i c e . I asked him what name t o use. T was assuming something European. He asked me t o name one European a n a l y s t . I was embarrassed. I C o u l d n o t . He s a i d t h a t was h i s p o i n t . Ha s a i d everyone t u r n e d t o me because I was American, and Americans c o u l d c a r e l e s s i f t h e i r c u r r e n c y r o s e o r f e l l . But Europeans were t r a p p e d i n t h e i r a n a l y s i s by t h e i r p a t r i o t i s m . The B r i t i s h were alweps b u l l i s h t h e pound; t h e German t h e mark, and t h e F r e n c h the. f r a n e The fundamental problems w i t h economic t h e o r i e s i a J u s t t h a t . They a r e t h e o r i e s , I d i d not seek t o e s t a b l i s h any new theory' n o - l e s s c r e a t e "laws" t h a t a r e f i x e d and u n y i e l d i n g . But we sometimes t r a v e l down a r o a d and g e t hungry. We s e a r c h f o r a p l a c e t o e a t and on t h a t r a r e o c c a s i o n , we stumble upon a new d i s c o v e r y - a g r e a t r e s t a u r a n t t h a t b r i n g s , a s m i l e t o o u r f a c e upon remembering. The economy i s l i k e a c h i l d , i t grows and matures. We may expect one c h i l d t c up i n one p r o f e s s i o n , o n l y t o d i s c o v e r t h e y e x p l o r e an e n t i r e l y d i f f e r e n t p a t h . problem w i t h economists i s t h e y have perhaps not seen what T have seen, s u c h as v a s t p o o l of' funds t h a t r u n s around t h e w o r l d a l t e r i n g t h e c o u r s e o f n a t i o n s d e s t r o y i n g t h e b e s t p l a n s o f men and p o l i t i c i a n s . than a they have

,_

end The the and

Why do we need t h e "New P r a c t i c a l 'Laws' o f G l o b a l Economics" t o d a y r c r e e v e r ? The r e a s o n i s we a r e f l y i n g i n a j e t b u t a r e s t i l l a c t i n g as i f we have prop-plane. Many o f t h e p i l o t s c o u l d n o t make t h e t r a n s i t i o n t o a j e t because were u n a b l e t o r e s p o n d q u i c k l y t o c o n s i d e r t h e d r a m a t i c i n c r e a s e i n speed. We t h e same problem i n managing t h e economy.

The t h e o r i e s t h a t p r e v a i l t o d a y bounce back and f o r t h between Keynes and Friedman w i t h a l i t t l e Marx thrown i n f o r f l a v o r . Do we i n c r e a s e money s u p p l y , l o w e r i n t e r e s t r a t e s and t a x e s , o r j u s t r e g u l a t e e v e r y t h i n g t h a t moves and p r e t e n d we a r e not t a k i n g t h e t o y s away from t h e k i d s as Marx advocated? Co we i g n o r e t h e I n v i s i b l e Eland o f Smith t o t h e p o i n t t h a t we a r e b l i n d t o t h e s e l f - i n t e r e s t o f Government t h a t cannot s l e e p a t n i g h t u n l e s s i t f e e l s i n complete c o n t r o l o f o u r lives? When g o l d was money, the c a p i t a l f l o w e d between n a t i o n s o n l y because t h e r e was, as D a v i d R i c a r d o e x p l a i n e d , a c o m p a r a t i v e a d v a n t a g e . . T h i s was t h e key t o i n t e r n a t i o n a l t r a d e - t h e i r d e s i r e t o purchase something one c o u l d not o b t a i n l o c a l l y o r was a t a s i g n i f i c a n t l e s s o r p r i c e a l l o w i n g f o r " a r b i t r a g e " t h a t gave b i r t h t o i n s u r a n c e t o c o v e r t h e r i s k o f l o n g voyages. T h i s " a r b i t r a g e " s t i l l e x i s t s t o d a y j u s t i n t h e form o f e l e c t r o n i c t r a d i n g on a g l o b a l s c a l e . We need a new u n d e r s t a n d i n g o f c a p i t a l and hew i t moves because we're not i n Oz anymore Dorothy! 2

Most t h e o r i e s i n economics a r e n o t p r a c t i c a l ' . because t h e y a r e based upon assumptions t h a t a r e not r e a l . The same p r o b l e m has wiped o u t t h e Investment Bankers because (1) t h e y c r e a t e mcdels by young s t u d e n t s who do n o t u n d e r s t a n d market dynamics, and (2) t h e y assume t h e r e i s always a market and f a i l t o map t h o s e p e s t y p e r i o d s when t h e model would f a i l such a s t h e G r e a t D e p r e s s i o n . TnTfiTls'-aitfn^^^ d i f f e r e n c e between t h e o p t i m i s t and t h e p e s s i m i s t . who b o t h a r e blown o f f t h e t o p o f t h e Empire S t a t e B u i l d i n g . The P e s s i m i s t says i m m e d i a t e l y - "Oh my God I am g o i n g t o d i e l " The o p t i m i s t can be heard w h i l e p a s s i n g t h e 4 t h f l o o r " W e l l so f a r so g o c d l "
i

LAW ffl - C a p i t a l Moves To A v o i d Danger G l o b a l l y


i

T h i s law would seem t o be s e l f - e v i d e n t . We have a l l heard o f t h e " f l i g h t t o q u a l i t y " where i n a domestic econcmic d e c l i n e , c a p i t a l f l e e s s t o c k s and p r i v a t e a s s e t s moving t o t h e b e s t q u a l i t y t h a t may be Government s h o r t - t e r m paper. However, c a p i t a l r e a c t s t h e same way g l o b a l l y and t h o s e reasons a r e n o t always a p p a r e n t d o m e s t i c a l l y . (1) c a p i t a l w i l l f l e e a war o r t h r e a t o f war. D u r i n g W o r l d War I and I I , t h e c a p i t a l f l o w e d t o t h e U n i t e d S t a t e s . By t h e end o f W o r l d War I I , t h e U n i t e d S t a t e s had 76% o f t h e w o r l d g o l d r e s e r v e s . D u r i n g t h e Suez C a n a l c r i s i s , t h e d o l l a r r o s e on c a p i t a l f l e e i n g Europe as t h e y once a g a i n p e r c e i v e d a r i s k , a l t h o u g h i t ; was v e r y b r i e f . Y e t d u r i n g t h e Cuba M i s s i l e C r i s i s , c a p i t a l f l e d t h e o p p o s i t e t o Europe. The same was t r u e f o r c a p i t a l began t o f l e e i n advance o f v a r i o u s m i d d l e e a s t wars. 12) c a p i t a l t a k e s f l i g h t when i t f e a r s u n s t a b l e economic c o n d i t i o n s t h a t can be caused by i n f l a t i o n , t a x a t i o n , n a t i o n a l i z a t i o n , g e o p o l i t i c a l , o r n e g a t i v e p e r c e p t i o n s i n p o l i t i c s - a n d t h e economy a l t e r i n g c o n f i d e n c e . EXAMPLE: The G r e a t D e p r e s s i o n was made f a r worse by p o l i t i c i a n s who d i d not u n d e r s t a n d g l o b a l c a p i t a l f l o w s t o q u a l i t y . I n H e r b e r t Hoover's Memoirs, he has a l l o f t h e d o c u m e n t a t i o n t h a t r e v e a l e d W o r l d War I I - began w i t h t h e f i n a n c i a l markets i n t h e 1930s t h a t l e d t o n a t i o n s a t t a c k i n g t h e i r bond markets t h a t l e d t o t h e w h o l e s a l e c o l l a p s e o f European d e b t . Even B r i t a i n went i n t o a moratorium on i t s d e b t s u s p e n d i n g a l l payments. These d e f a u l t s : s e n t c a p i t a l f l e e i n g t o t h e U n i t e d S t a t e s c a u s i n g t h e d o l l a r t o r i s e and i n t e r e s t r a t e s t o f a l l i r r e s p e c t i v e o f Fed p o l i c y . P o l i t i c a n s o n l y viewed t h e r i s e i n t h e d o l l a r and responded w i t h p r o t e c t i o n i s m - Smcot-Hawley i n J u n e 1930 d e s t r o y i n g i n t e r n a t i o n a l t r a d e and s e n d i n g t h e economy back i n t o a f e u d a l s t a t e o f economic dark ages. Had t h e r e been t h e u n d e r s t a n d i n g o f t h e " f l i g h t t o q u a l i t y " t h a t can emerge f o r a h o s t o f i n t e r n a t i o n a l reasons t h a t swamp t h e d o m e s t i c c o n d i t i o n s , perhaps t h e r e may have been some hope. The 1987 Crash was caused by t h e f o r m a t i o n o f t h e G-5 i n 1985 and t h e p e r s i s t e n t t a l k about l o w e r i n g t h e v a l u e o f t h e d o l l a r by 40% t o reduce t h e t r a d e d e f i c i t . The Japanese, who'had bought up t o 33% o r so o f t h e n a t i o n a l d e b t and l o a d s o f r e a l e s t a t e l i k e R o c k e f e l l e r P l a z a i n New York, were b e i n g t o l d i n d i r e c t l y t h a t whatever i n v e s t m e n t s t h e y made were g o i n g t o be d e v a l u e d by 40%. The 1987 c r a s h t o o k p l a c e w i t h everyone b e f u d d l e d because t h e r e was no change i n t h e domestic fundamental c o n d i t i o n s o f t h e economy o r c o r p o r a t e , e a r n i n g s . The f l i g h t Of c a p i t a l by t h e Japanese caused by t h e G-5, l e d t o t h e c a p i t a l c o n c e n t r a t i o n i n J a p a n w i t h f o r e i g n i n v e s t o r s l o o k i n g a t a r i s i n g yen a s s e t s c r e a t i n g t h e 1989 h i g h .
3

A n o t h e r example i s a mincl t w i s t e r . Between 1980 and 1985 I was g i v i n g l e c t u r e s t h r o u g h o u t Europe. The number one q u e s t i o n T was asked? What was my o p i n i o n o f t h e U n i t e d S t a t e s a d o p t i n g a t w o - t i e r c u r r e n c y system? I u n d e r s t o o d the q u e s t i o n o n l y because I s t u d i e d money g l o b a l l y and had a l s o c l i e n t s from South A f r i c a when t h e r e was t h e Hand and t h e ' ' F i n a n c i a l -Randy"--One c u r r e n c y i s used; don^tica-lly,-^but-It-canriot-be-HseQV-fQr any purchase o f goods & s e r v i c e s o u t s i d e t h e c o u n t r y . The r a n d toould need t o be c o n v e r t e d t o t h e " F i n a n c i a l Hand" t h a t was a l l o w e d t o be u s e d e x t e r n a l l y c r e a t i n g t h e t w o - t i e r system. The E u r o - D o l l a r market had h i t $1 t r i l l i o n n e a r l y i n 1980 as d i d t h e US n a t i o n a l debt. ;Europeans were c o n v i n c e d t h e way t o escape t h e d e h t was f o r t h e US t o c r e a t e a t w o - t i e r c u r r e n c y . T h i s l e d them t o move t h e i r E u r o - C o l l a r d e p o s i t s . i n t o o n s h o r e d o m e s t i c d o l l a r d e p o s i t s . They had assumed t h a t t h e E u r o - d o l l a r s w o u l d be new " b l u e " d o l l a r s w o r t h l e s s t h a n t h e domestic "green" d o l l a r s . The more c o n v i n c e d t h e r i s k was p e r c e i v e d , the more c a p i t a l f l o w e d . The E u r o - D o l l a r d e p o s i t s d e c l i n e d s h a r p l y and t h i s d r o v e t h e d o l l a r t o r e c o r d h i g h s i n 1985. The more b e a r i s h ' Europeans became, t h e more b u l l i s h t h e d o l l a r t r e n d . T h i s was amazing t o see. Government m i s u n d e r s t o o d c r e a t i n g t h e G-5 i n ;1985 a n n o u n c i n g t h e y wanted t o see . . t h e d o l l a r d e c l i n e by 40%. The Japanese began t o s e l l US i n v e s t m e n t s t a k i n g c a p i t a l back c a u s i n g t h e y e n t o r i s e a t t a c h i n g o t h e r s c r e a t i n g a bubble t o p . Law #2 - C a p i t a l Moves G l o b a l l y F o r Comparative Advantages i n Currency The t r a d i t i o n a l H i c a r d o model o f comparative ; advantage was b u i l t upon a w o r l d when g o l d was money, We must r e a l i z e t h a t p r i o r t o 197T w i t h o n l y b r i e f e x c e p t i o n s , the c a p i t a l f l o w e d o n l y because o f a comparative advantage r e f l e c t e d i n investment r a t e s o f r e t u r n , t o g a i n goods t h a t were n o t a v a i l a b l e i n t h e d o m e s t i c economy, o r f o r a r b i t r a g e i n s o f a r as t h e same produce a v a i l a b l e i n one n a t i o n was cheaper when compared t o d o m e s t i c p r i c e s , t h e n t r a d e i n t e r n a t i o n a l l y w o u l d t a k e p l a c e e x p l o i t i n g those d i f f e r e n t i a l s t h a t was an e a r l y form o f g l o b a l a r b i t r a g e . However, we a r e no l o n g e r i n a w o r l d o f a g o l d s t a n d a r d where money i s t h e same r e l a t i v e i n t e r n a t i o n a l l y . G o l d might buy more goods i n one n a t i o n t h a n a n o t h e r , b u t i t i s t h e d i f f e r e n t i a l i n t h e p r i c e o f goods r e l a t i v e t o t h e same amount o f g o l d t h a t f l u c t u a t e s due t o o t h e r e x t e r n a l f a c t o r s - l a b o r & t r a n s p o r t a t i o n c o s t s . Today, a f l o a t i n g exchange r a t e system has a l t e r e d t h a t t i m e honored t r a d i t i o n and t h i s a f f e c t s e v e r y economic t h e o r y r e n d e r i n g them i r r e l e v a n t . (1 ) c a p i t a l may now move a c c o r d i n g t o t h e o l d p r i n c i p l e s o f t r a d e and s e e k an a r b i t r a g e t o purchase t h e same goods cheaper i n another l a n d t h a t has a comparative advantage s u c h a s l o w e r l a b o r c c s t s , l i t t l e o r no t a x r a t e s , o r on seme o c c a s i o n s d e l i b e r a t e p r i c i n g , .below c o s t t o g a i n market share- ( r a r e e v e n t ) _ (2) c a p i t a l may a l s o move s o l e l y because o f c u r r e n c y f l u c t u a t i o n s , o r d i f f e r e n t i a l s i n i n t e r e s t r a t e s s u c h as t h e c a p i t a l o u t f l o w s from J a p a n t o g a i n . t h e h i g h e r r a t e s o f i n t e r e s t i n d o l l a r s , where no s u c h comparative advantage e x i s t s s o l e l y due t o t r a d e , b u t t h e c a p i t a l f l o w s due t o c u r r e n c y may i n f a c t a l t e r t h e t r a d e b a l a n c e . Where under our f i r s t Law c a p i t a l f l o w s t o a v o i d g l o b a l r i s k , h e r e we f i n d i n the c a l m o f t h e storm, c a p i t a l w i l l f l o w p u r e l y a c c o r d i n g t o t h e a r b i t r a g e i t sees i n v a l u e s . T h i s i s what H i l t o n Friedman advocated back i n 1953. He saw t h a t t h i s n a t u r a l f l o w would p l a c e a check and b a l a n c e upon governments. I n r e a l i t y , t h i s i s the manner i n w h i c h c a p i t a l a l s o v o t e s r e l a t i v e t o t h e p o l i t i c s o f a n a t i o n . We a r e no l o n g e r i n Qz. C a p i t a l w i l l f l o w not because o f s o l e l y t h e c o m p a r a t i v e advantage i n t r a d e , b u t i n t h e v a l u e o f money i t s e l f . They can a t t u n e s b o t h b e ' a r b i t r a g e .

The New Practical "Laws" of Global Economics

There a r e e t h e r "Laws" t h a t now e x i s t a l s o w i t h i n o u r new G l o b a l Economy, However, l e t -us s t i c k t o these' f i r s t two Laws for. t h e y a l o n e a l t e r e v e r y t h e o r y i n ecorrrnics t o d a t e . The " p r a c t i c a l " s i d e o f t h e s e two r e a l i z a t i o n s i s t h a t t h e e n t i r e f i e l d o f economics changes much l i k e what G a l i l e o d i d t o dogma- I f t h e p l a n e t s r e v o l v e around t h e sun r a t h e r t h a n t h e sun a r o u n d t h e p l a n e t , t h e n where i s up and where i s down? T r a n s l a t e t h i s i n t o heaven and h e l l , and you can see why he was i m p r i s o n e d f o r l i f e . ' Suddenly, how we manage o u r economy i s no l o n g e r autonomous. The t h e o r y o f chaos you m i g h t r e c a l l was e x p l a i n e d t h a t t h e f l a p o f t h e wings o f a b u t t e r f l y i n A s i a Could s e t i n m o t i o n changes t o t h e winds i n t h e A m e r i c a s . A l t h o u g h extreme, t h e p r i n c i p l e remains t h e same - k i n d o f L i k e a s c i - f i movie - "We a r e not a l o n e * " Indeed, the a c t i o n s o f one w i l l have an impact upon a l l o t h e r s . We cannot escape the consequences o f o u r own a c t i o n s - I t i s j u s t i i i j j a s s i b l e . I n my g l o b e - t r o t t i n g r u n n i n g between n a t l o n a and g e t t i n g t o see f i r s t hand what was b a k i n g p l a c e , , my eyes opened l i k e never b e f o r e . T h i s i s what M i l t o n perhaps saw i n me b e f o r e I m y s e l f r e a l i z e d t h e f u l l scope o f what I had f a l l e n i n t o . They d i d n o t t e a c h g l o b a l c a p i t a l f l o w s i n s c h o o l . They d i d not even t e a c h h e d g i n g and f l o a t i n g exchange r a t e s . T h i s was a f i e l d t h a t j u s t emerged more a k i n t o b e i n g an a p p r e n t i c e . B u t what 1 o b s e r v e d g l o b a l l y was t h e grand I n v i s i b l e Hand o f Sdam S m i t h (1723-1790), y e t on an i n t e r n a t i o n a l l e v e l . The image i n my mind was each n a t i o n formed a g e a r i n one g i a n t machine we c a l l t h e economy o f n a t i o n s . T u r n one, and t h e r e M i l l be an e f f e c t i n a l l o t h e r s . We a r e a l l connected.

How do we c r e a t e a p r a c t i c a l t h e o r y ? K a r l Marx (1818-1883) saw t h e c o l l a p s e i n c a p i t a l i s m as a c l a s s s t r u g g l e between l a b o r and employer a s s u m i n g t h e l a t e r would e x p l o i t l a b o r t o t h e p o i n t t h e y c o u l d no l o n g e r consume. He i g n o r e d S m i t h and p a i d no mind t o money s u p p l y and the boom b u s t economic c y c l e . He d e s t r o y e d (1) p e r s o n a l l i b e r t y p l a c i n g i t i n t h e hands o f government f o r t h e g r e a t e r - g o o d , and (2) i g n o r e d t h e s e l f - i n t e r e s t o f t h e s t a t e t o a l s o expand i t s p e r s o n a l power. I t was I v a n I V (1533-84) "the T e r r i b l e " who s e i z e d l a n d o f h i s enemies, and_gave i t t o h i s s u p p o r t e r s y e t r e a l i s e d i f t h e w o r k e r s l e f t , t h e l a n d became w o r t h l e s s . He e n a c t e d a law t h a t t h e w o r k e r s ( s e r f a ] c o u l d n o t l e a v e l a y i n g t h e seeds f o r t h e R u s s i a n r e v o l u t i o n i n 1917. C l e a r l y , o t h e r r u l e r s saw t h e problem, b u t d i d r i o t h i n g t o c o r r e c t i t . A l e x a n d e r I (1777-1825) came t o power i n 1801 and spoke about r e f o r m , b u t t h e n Napoleon i n v a d e d p u t t i n g an end t o t h a t p o s s i b i l i t y . So Marx was wrong. I t was n o t l i m i t e d t o employers, b u t c o u l d a l s o be t h e s t a t e t h a t i n f a c t e x p l o i t e d t h e p e o p l e . Handing a l l t h e a s s e t s t o t h e s t a t e and d e s t r o y i n g t h e l i b e r t y o f i n d i v i d u a l s , was n o t t h e answer. To f i x what i s wrong, r e q u i r e s a c l e a r working knowledge o f what we a r e t r y i n g t o f i x , " Bad t h e o r i e s and assumptions have l e d t o the d e a t h s o f m i l l i o n s . We need " p r a c t i c a l " economics - n o t t h e o r i e s .

Xff Times L i k e The P r e s e n t Should F o l l o w Keynes o r F r i e d m a n ? o r Do Wg. freed a New Theory A l t o g e t h e r ? un<3^g^gj^j^g_Kgygg^ and Friedman mayjnean t h e d i f f e r e n c e _ between s u r v i v a l o r e c o n o r c ^ d e s t r u c t i o n t h a t l e a d s always t o war,. The fibrietarists "ac^sed'Keyne~s " o f i g n o t f i ^ g money. T h i s i s t r u l y a c r i t i c a l p o i n t t h a t must be u n d e r s t o o d . By a d v o c a t i n g two t o o l s i n t e r e s t r a t e s and t a x e s , Keynes i s a p p r o a c h i n g t h e economy irjdirectlY" o t h e r n e e d s , t o s t o p s c a n b e h a v i o r t h e government dries n o t l i k e i n you, i t i s d i r e c t l y a t t a c k i n g y o u r w i f e i n hopes she w i l l cause a change i n your b e h a v i o r . J a p a n was i n a v e r y bad economic d e p r e s s i o n . T t l o w e r e d i n t e r e s t r a t e s t o * t e n t h - o f - o n e p e r c e n t ( 0 . 1 % ) , i t was v i r t u a l l y z e r o . A l l t h i s d i d was c a u s a c a p i t a l t o seek i n t e r e s t r a t e p r o f i t s elsewhere and d i d n o t h i n g t o r e l i e v e t h e economic downturn i n J a p a n . The f i n a l l o w may come i n 2009 a f t e r t h e 1989 h i g h , w a i t i n g f o r a p o s s i b l e l o w 20 y e a r s l a t e r , i s n o t a c c e p t a b l e f i s c a l p o l i c y . . Economic d e c l i n e s can he v e r y p r o l o n g e d . From t h e 1873 P a n i c i n t h e U n i t e d S t a t e s , t h e e c o n o m i c d e c l i n e l a s t e d o v e r a l l u n t i l 1896 - 23 y e a r s l a t e r . T h a t i s a w a s t e o f g e n e r a l l y 1/3rd o f everyone's l i f e t i m e Tfie M o n e t a r i s t s ' a p p r o a c h i s t o i n c r e a s e t h e money s u p p l y , n o t u s e i n d i r e c t means t h ^ t hope w i l l change e v e n t s . T f we s i m p l y gave everyone $1,000, 'there i s no g u a r a n t e e t h a t they would spend i t . I f t h e i r c o n f i d e n c e i s s t i l l d i s t r u s t i n g , t h e y may 3st pocket t h e money w a i t i n g f o r a r a i n y day. T h i s would n o t i n c r e a s e t h e mmeY s u p p l y f o r t h a t we measure t r u l y i n terms o f v e l o c i t y , i f we c o l l e c t i v e l y add up Che economy i n what we c a l l t h e G r o s s Domestic P r o d u c t {"a^P"), and we d i v i d e t h a t by t h e money s u p p l y , we a c h i e v e what i s known a s t h e t u r n o v e r r a t e ( V e l o c i t y ) I f t h e money s u p p l y d i v i d e d i n t o QDP c r e a t e s a v e l o c i t y r a t e o f 6:1, t h i s me^ t h e " f l o a t " o r h o l d i n g p e r i o d b e f o r e spending i s about 2 months. I f we i n c r e a s e t h a t r a t e t o 12:1 t h e t i m e p e r i o d d r o p s t o 1 month. We d e f i n e Ml money s u p p l y fl^I
110

(1) t h e amount Of c u r r e n c y h e l d o u t s i d e hanks (2) t h e c h e c k i n g a c c o u n t s a t commercial banks (demand d e p o s i t s ) T h i S i s a v e r y narrow v i e w o f money, i t does- n o t i n c l u d e s t o c k s , bonds, and r e a l e s t a t e - t h r e e m a j o r a r e a s where c a p i t a l c a n r e s i d e and i s c o n s i d e r e d t o be "wealth* e v e r y r a t i o n a l p e r s o n . Where problems a l s o e n t e r i s t h e a s s u m p t i o n o f a p e x f e c t - w o r l d . I f t h e v e l o c i t y i s c o n s t a n t , t h e n i f t h e c e n t r a l bank can t r u l y m a n i p u l a t e t h e money s u p p l y ( v e l o c i t y ) , t h e y would have a d i r e c t t o o l t h a t i s f a r b e t t ^ T t h a n i n t e r e s t r a t e s a n d t a x e s . However, i f t h e v e l o c i t y c a n f l u c t u a t e w i d e l y ^ c c u r d i n g t o t h e " c o n f i d e n c e " o f t h e people, then m a n i p u l a t i n g t h e money s u p p l y W0"ild a l s o be reduced t o a n i n d i r e c t t o o l . ; Here i s where t h e f o r c a s o f Keynes Friedman c l a s h . Keynes argues t h a t t h e v e l o c i t y i s u n s t a b l e , whereas F r i e d m a n would t a k e t h e o p p o s i t e p o s i t i o n .
1

The o e b a t e about money may be t h e t h i r d o l d e s t p r o f e s s i o n . P r i o r t o a b o u t 600 BC, rt^ney t r a d e d i n clumps o f s i l v e r and g o l d and i n some areas o f I t a l y i t took t h e ^ c a t t l e and l a t e r b r o n z e . E v e r y t i m e t h e r e was a t r a n s a c t i o n , t h e m e t a l h&d t o be t e s t e d and weighted- K i n g Croesus o f L y d i a ( c a 560-546 EC) {Turkey) came up w i t h t h e i d e a t h a t he would p r e - t e s t and pre-weigh g o l d c r e a t i n g t h e f i r s t c o i n a g e . Other k i n g s q u i c k l y caught o n and i t became a sweeping new t r e n d o f a show o f power a n d w e a l t h . E c o n o m i c a l l y s p e a k i n g , i t was o s t e p toward making c o n m e r c e ^ e f f i c i e n t and t h u s i n c r e a s e d p r o g r e s s and t h e v e l o c i t y o f money. T r a d e expanded ^ t h e age o f empire b u i l d i n g f o l l o w e d s h o r t l y t h e r e a f t e r . I t was Money i n t h e f o r m o f a s t a n d a r d u n i t o f exchange t h a t f u r t h e r e d i n t e r n a t i o n a l t r a d e . The r e f e r e n c e t o J e s u s o v e r t h r o w i n g t h e t a b l e s a t t h e Temple s t a t e s t h e y were t h e t a b l e s o f t h e "iflOney c h a n g e r s " J o h n 2:15, who i ^ r e t h e a n c i e n t f o r e i g n exchange d e a l e r s .
f o r m a r

The i n v e n t i o n o f money brought w i t h i t t h e n a t u r a l consequence o f t h e i n e v i t a b l e c o u n t e r f e i t i n g . However, c o u n t e r f e i t i n g has n e v e r r e s u l t e d i n w i d e s p r e a d i n f l a t i o n even when used f o r t h e m i l i t a r y p u r p o s e ' o f undermiruug t h e c u r r e n c y o f one's opponent used by England a g a i n s t t h e American c o l o n i e s d u r i n g t h e R e v o l u t i o n as w e l l a s d u r i n g tftf I I , The s i n g l e g r e a t e s t t h r e a t t o t h e money s u p p l y h a s always come from t h e i s s u i n g government i t s e l f . "

The above c h a r t i l l u s t r a t e s t h e m e t a l c o n t e n t o f t h e Roman Monetary System. I t was t h e s t e a d y debasement o f t h e s i l v e r c o n t e n t o f t h e Roman D e n a r i u s t h a t f i n a l l y l e d t o a n a l l o u t c o l l a p s e d u r i n g t h e T h i r d C e n t u r y AD, F o r c e n t u r i e s , governments have sought t o expand t h e i r money s u p p l y by d e b a s i n g t h e c u r r e n c y . I n Other words, r e d u c i n g t h e c o n t e n t o f p r e c i o u s m e t a l s t o e n a b l e t h e same amount Of g o l d and s i l v e r t o c r e a t e more c o i n a g e . The economic a d v i s o r t o Queen E l i z a b e t h I Correctly observed t h e response t o such p r a c t i c e s among t h e p o p u l a t i o n . I t was one Of t h e e a r l i e s t Economic Laws e s t a b l i s h e d - Bad money d r i v e s good mcney o u t Of c i r c u l a t i o n - s i r Thomas Gresham (1519-1579 AD). H i e economic h a r d s h i p s t h a t E l i z a b e t h f a c e d d u r i n g h e r r e i g n between 1533 and 1603 i n c l u d i n g t h e d e f e a t o f t h e S p a n i s h Armada, p u t g r e a t econcmic p r e s s u r e t h a t was seen i n t h e debasement of c o i n a g e . Indeed, Gresham" s Law p r o v e d t o be c o r r e c t d u r i n g t h e 1960s when s i l v e r was t a k e n o u t o f modern c o i n a g e b e i n g r e p l a c e d w i t h n i c k e l and copper. The s i l v e r c o i n s q u i c k l y d i s a p p e a r e d and were w o r t h a premium t o t h e "bad" money t h a t e n t e r e d t h e w o r l d economies. The n o t i o n about w a t c h i n g t h e money has been around f o r a l o n g t i m e - f a r l o n g e r t h a n Keynes i a n t h e o r y . H i e famous e c o n o m i s t o f t h e G r e a t D e p r e s s i o n e r a I r v i n g F i s h e r (1867-1947) d e r i v e d a f o r m u l a i n 191T i n s p i r e d by J o h n S t u a r t H i l l ' s a n a l y s i s c r e a t i n g t h e " q u a n t i t y t h e o r y " o f money.being MV PQ. The "V" i s t h e v e l o c i t y o f "M" money s u p p l y where t h e "PQ" r e p r e s e n t s G)P f P " b e i n g t h e p r i c e l e v e l , and "Q b e i n g t h e q u a n t i t y o f goods & s e r v i c e s p r o d u c e d ) . T h i s e q u a t i o n Can be r e d u c e d t o e x p l a i n t h e M o n e t a r i s t t h e o r y i n i t s most s i m p l i s t i c form, t h a t a m a n i p u l a t i o n o f "M" (monev s u o o l v ) w i l l c r e a t e a d i r e c t a f f e c t i n "P" ( p r i c e s ) t h a t we i n s t i n c t i v e l y v i e w as " i n f l a t i o n " d e f i n e d a s ( t o o much money c h a s i n g t o o few g o o d s ) . H i s t o r i c a l l y , i t was always t h e s u p p l y o f money and i t s q u a l i t y t h a t had t h e impact upon t h e economy o f mankind. 7
f n

The M o n e t a r i s t s m a i n t a i n t h a t an, i n c r e a s e i n government s p e n d i n g w i l l n o t d i r e c t l y a f f e c t p r i c e s u n l e s s i h e mcney e - p p i y a L a o c^ar.gasJ T h i s i s a very ^ r i ~ r ; a l p o i n t t o keep I n mind. P e o p l e g e n e r a l l y assume t h a t a d e f i c i t i n spending w i l l be- d i r e c t l y i n f l a t i o n a r y . We must r e a l i s e t h a t t h e g o l d s t a n d a r d i s dead- What we e v e n d e f i n e a s "money" w i t h i n Hi e f f e c t s o u r e n t i r e c o n c e p t o f how t o manage t h e econcmy a s a whore.---If b o n d s - a r e - ^ Q t p ^ t - Q ^ ^ e H ^ n e i t h e r w o u l d d e r i v a t i v e s o n such p r o d u c t s . These i d e a s a r e o b v i o u s l y wrong i n t h e f a c e o f o u r c u r r e n t c r i s i s . Under M l , d e r i v a t i v e s do n o t e x i s t . He d o n o t l i v e i n a p u r e l y K e y n e s i a n w o r l d . The F e d e r a l R e s e r v e does i n f a c t seek t o m a n i p u l a t e t h e money s u p p l y a s p a r t o f i t s t o o l s . F i r s t , t h e r e i s t h e d i s c o u n t r a t e where i t l e n d s money t o t h e banks t h a t i n t u r n l e n d money i n t o t h e economy i n normal c o n d i t i o n s when n o t c o v e r i n g l o s s e s i n a c r i s i s . I f t h e F e d r a i s e s o r l o w e r s t h e r a t e o f i n t e r e s t , i t w i l l i n 'theory a f f e c t t h e l e n d i n g o f t h e banks by r e d u c i n g t h e i r b o r r o w i n g s by r a i s i n g r a t e s h i g h e r . B u t i f t h e d e b t c r i s i s i s c a u s i n g a c o l l a p s e , then p e o p l e w i l l pay h i g h e r r a t e s t o s t a y a f l o a t . T h e r e f o r e , we must be c a u t i o u s a b o u t making t o o many assumptions based upon t h e p e r f e c t w o r l d . T h i s c a n d i r e c t l y i n c r e a s e o r d e c r e a s e t h e money s u p p l y t h r o u g h t h e l e n d i n g t o banks, b u t i t i s n o t a. l i m i t a t i o n upon t h e b o r r o w i n g t h a t i s b e i n g employed a s t h e t o o l , i t i s t h e i n d i r e c t e f f o r t t o a f f e c t demand by i n t e r e s t r a t e s . Second, t h e money s u p p l y i s more d i r e c t l y m a n i p u l a t e d by t h e b u y i n g and s e l l i n g o f Government bonds. The F e d can i n c r e a s e t h e money s u p p l y as d e f i n e d by Hi t h r o u g h b u y i n g Government bonds from t h e p u b l i c i r r j e c t i n g t h e r e f o r e c a s h . I t can reduce money s u p p l y b y s e l l i n g Government bends i n t o t h e market t a k i n g i n e x c e s s c a s h . These assumptions a r e what were t a u g h t i n s c h o o l , b u t guess what? They a r e wrong I T h i s e n t i r e model i s based upon t h e a s s u m p t i o n o f a g o l d s t a n d a r d and a r e l a t i v e l y c l o s e d economy. L e t us s a y t h a t t h e F e d d e s i r e s t o s t i m u l a t e t h e economy SO i t i n c r e a s e s t h e money s u p p l y i n t h e o r y by b u y i n g Government bonds. T h i s would work assuming t h e s e l l e r t o t h e F e d i s a l o c a l r e s i d e n t . I f China d e c i d e d t o s e l l US bonds i t h o l d s because i t suddenly needs c a s h , t h e F e d purchase w i l l n o t then s t i m u l a t e t h e (Infill l< eomomy a t a l l f o r t h e money i n j e c t e d i n t o t h e system i s headed t o C h i n a - Hence, a n i n c r e a s e i n money s u p p l y i s n o t always i n f l a t i o n a r y I Our d e f i n i t i o n o f money i s f a r t o o narrow i n a F l o a t i n g Exchange Rate System. I f we l o o k a t a p i e c e o f r e a l e s t a t e t h a t changes hands f o r $1 b i l l i o n and one American s e l l s i t t o a n o t h e r , t h e n e t e f f e c t i n t h e money s u p p l y i s z e r o . However, i f J a p a n e n t e r s and buys t h a t same p i e c e o f r e a l e s t a t e , t h e y b r i n g yen, c o n v e r t i t t o d o l l a r s , a n d now one American has $1 b i l l i o n i n h i s pocket t h a t d i d n o t e x i s t p r e v i o u s l y ! M i l t o n may n o t have w i t n e s s e d what I have s e e n f i r s t hand, b u t he saw t h a t t h e p o s s i b i l i t y e x i s t e d where changes i n t h e s u p p l y o f money d i d n o t e f f e c t m e r e l y p r i c e s i n t h e i n f l a t i o n a r y model, b u t economic a c t i v i t y . T h a t h a s come back t o haunt u s i n a F l o a t i n g Exchange Rate System t h a t goes f a r beyond what M i l t o n e n v i s i o n e d back i n 1953.
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The M o n e t a r i s t s assumed t h a t v e l o c i t y was s t a b l e and thus an i n c r e a s e i n money s u p p l y would r e s u l t i n g r e a t e r spending o f t h e e x t r a cash on goods and s e r v i c e s c a u s i n g Q> t o r i s e . The F e d c o u l d s l o w t h e growth r a t e b y s e l l i n g bonds t a k i n g c a s h o u t o f t h e system. B u t t h e s e assumptions a r e n o t r e a l , f o r t h e v e l o c i t y c a n and w i l l change depending upon ''confidence" and i n a F l o a t i n g Exchange Rate System t h e F e d c a n n o t d i r e c t l y be s u r e i t i s p u t t i n g money i n t o o r t a k i n g o u t o f t h e system when t h e r e a r e f o r e i g n h o l d e r s o f debt. The model b e g i n s t o decompose under o u r new dynamic g l o b a l economic system.

Keynes d i s a g r e e d w i t h t h e M o n e t a r i s t ' s Uew t h a t money s u p p l y was t h e k e y . Keynes a c t u a l l y began w i t h a f o c u s upon money s u p p l y and e v o l v e d i n t o t h e p o l i c y t h e o r y o f i n t e r e s t r a t e s and t a x m a n i p u l a t i o n , whereby M i l t o n began w i t h t h e K e y n e s i a n model and r e v e r t e d back t o s t u d y money s u p p l y c o n c l u d i n g t h a t Keynes would c r e a t e m a s s i v e new s p e n d i n g t h a t would o n l y l e a d t o i n f l a t i o n . Was he c o r r e c t ? Keynes bought i n t o t h e money s u p p l y model a f t e r v i e w i n g t h e h y p e r i n f i a t i f ^ _ cif" rnenSerinan Weimar R e p u b l i c between f921~and'"i 924 T Keynes viewed i n ' h i s T r a c t o n " " Monetary Reform t h a t i t was t h e i n c r e a s e i n t h e q u a n t i t y o f money t h a t caused t h e p o p u l a t i o n t o spend money f a s t e r t h a t i n t u r n l e d t o e s c a l a t i n g p r i c e adanvances. However, Keynes f l i p p e d p o s i t i o n s a f t e r t h e G r e a t D e p r e s s i o n i n h i s G e n e r a l T h e o r y he b e l i e v e d i t was a c o l l a p s e i n demand r a t h e r t h a n money s u p p l y , t h a t l e d h i m t o h i s t o o l s o f i n t e r e s t r a t e s and t a K e s . Keynes saw no r e a s o n why t h e v e l o c i t y o f money would remain s t a b l e . Keynes was n o t s u r e t h a t a mere i n c r e a s e i n money s u p p l y would t r a n s l a t e i n t o more s p e n d i n g o f excess c a s h . He r e c o g n i z e d t h a t a n i n c r e a s e i n money s u p p l y may n o t produce a n i n c r e a s e i n v e l o c i t y f o r p e o p l e c o u l d s t u f f i t i n t h e i r m a t t r e s s e s , and t h u s t h e d e c l i n e i n v e l o c i t y would n e g a t e t h e i n c r e a s e i n money s u p p l y . Keynes a l s o argued t h a t o t h e r s may h o a r d c a s h t o a l s o s p e c u l a t e i n s t o c k s o r bonds. Keynes t h u s saw t h a t i n t e r e s t r a t e s c o u l d e f f e c t t h e s p e c u l a t i v e demand and i n h i s mind had a more d i r e c t e f f e c t t h a n money s u p p l y c o n c l u d i n g t h a t a i n c r e a s e i n money s u p p l y m i g h t be o f f s e t by a i n c r e a s e i n h o a r d i n g . Keynes t h u s t o o k t h e a n t i - M o n e t a r i s t p o s i t i o n i n a l e t t e r a d v i s i n g P r e s i d e n t F r a n k l i n D. R o o s e v e l t ; "Seme p e o p l e seem t o i n f e r ... t h a t o u t p u t and -~xme c a n be r a i s e d by i n c r e a s i n g t h e q u a n t i t y o f money. B u t t h i s i s l i k e t r y i n g t o g e t f a t by b u y i n g a l a r g e r b e l t . I n t h e U n i t e d S t a t e s t o d a y y o u r b e l t i s p l e n t y b i g enough f o r y o u r b e l l y .
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The C o l l e c t e d W r i t i n g s o f J o h n Maynard Keynes ( V o l XXI^

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London; M a c m i l l a n / S t . M a r t i n ' s P r e s s f o r t h e R o y a l Economic S o c i e t y 1973 R o o s e v e l t t o o k t h e money approach by (T) c o n f i s c a t i n g a l l g o l d , and (2) he then d e v a l u e d t h e d o l l a r o f f i c a l l y i n c r e a s i n g t h e s u p p l y o f money r e l a t i v e t o g o l d by r e v i s i n g t h e system from $20 f o r a n ounce o f g o l d t o $35. T h i s d i d n o t have t h e w i d e s p r e a d e f f e c t t h a t he perhaps s e c r e t l y b e l i e v e d - R o o s e v e l t a l s o made i t i l l e g a l , f o r Americans t o own - g o l d . That was n o t o v e r r u l e d u n t i l 1975. I t was presumed t h a t i f t h e p u b l i c c o u l d s t i l l hoard g o l d , they would do s o , and d e f e a t t h e b e s t e f f o r t s t o i n f l a t e . There was something l u r k i n g i n t h e bushes t h a t was a l s o t h e s i l v e r l i n i n g i n t h e d a r k c l o u d s o f t h e G r e a t D e p r e s s i o n . I t was n a t u r e and h e r 7 y e a r d r o u g h t o f B i b l i c a l p r o p o r t i o n s a s i n t h e s t o r y o f Joeseph. The G r e a t D e p r e s s i o n f o r c e d a new age o f p r o g r e s s by n e c e s s i t y - t h e new age o f s k i l l e d l a b o r f u l f i l l i n g t h e c u l m i n a t i o n o f t h e I n d u s t r i a l R e v o l u t i o n . Keynes t h u s viewed t h e w o r l d e n t i r e l y d i f f e r e n t l y . Keynes saw t h a t t h e economic f o r c e s o f p r o d u c t i o n were m o t i v a t e d t h r o u g h i n t e r e s t r a t e s and i n v e s t m e n t r a t h e r t h a n consumption. Keynes was perhaps t o o d e e p l y i n v o l v e d i n h i s p e r s o n a l w o r l d o f investment t o see t h e o t h e r s i d e o f t h e s t r e e t . Keynes b e l i e v e d t h a t t o g e t GDP t o r i s e , i n t e r e s t r a t e s had t o be lowered t h a t would s t i m u l a t e b o r r o w i n g from banks t o buy t h e goods and s e r v i c e s - Thus, he saw t h e G r e a t D e p r e s s i o n a s a c o l l a p s e i n t h i s demand. K e y n e s i a n economics h a s been p r o v e n t o be f a l s e j u s t l o o k i n g a t t h e d e c l i n e i n J a p a n . The i n t e r e s t r a t e s t h a t f e l l t o n e a r l y z e r o d i d n o t h i n g t o r e s t a r t .demand and because o f t h e F l o a t i n g Exchange Rate System, t h e r e was a n e s c a p e v a l u e - t h e a b i l i t y t o borrow y e n f o r n e x t t o n o t h i n g and i n v e s t i t o v e r s e a s e a r n i n g 600% more and t h a t would have no e f f e c t upon s t i m u l a t i n g domestic demand. B y t h e 1950s, M i l t o n had moved away from K e y n e s i a n i d e a s he h a r b o r e d i n t h e 1940s v i e w i n g t h a t i g n o r i n g t h e money s u p p l y was a s e r i o u s e r r o r . 9

M i l ton broadened h i s v i e w t o s u p p o r t t h e i d e a t h a t t h e demand f o r money and v e l o c i t y was s t a b l e by t u r n i n g t o the l o n g - t e r m f a c t o r s o f e d u c a t i o n , h e a l t h and income o f t h e f a m i l y o r i n d i v i d u a l o v e r decades - the s a v i n g f o r r e t i r e m e n t approachM i l t o n a l s o a t t a c k e d K e y n e s i a n i d e a s t h a t consumption r o s e and f e l l a l o n g w i t h t h e s h o r t - t e r m income. H i l t o n argued t h a t p e o p l e t o o k a l o n g e r - t e r m v i e w t o t h e i r l i f e and f i n a n c e s . H i l t o n was c o r r e c t , f o r t h e r e would be no market f o r L i f e I n s u r a n c e "iF'ffi^ie^ToiHih^ viewed t h a t consumption would be a l s o s t a b l e f o r t h e l o n g - t e r m e x p e c t a t i o n s o f t h e family or i n d i v i d u a l i I f we l o o k a t t h e e v e n t s o f t h e G r e a t D e p r e s s i o n , i t i s h a r d t o see how Keynesian economics would have r e a l l y worked, i n t e r e s t r a t e s c o l l a p s e d f o e t h r e e p r i m a r y r e a s o n s w i t h no economic e f f e c t ; (1) t h e Fad d i d lower r a t e s , (2) t h e r e was a f l i g h t t o q u a l i t y f o r c i n g s h o r t - t e r m r a t e s t o near z e r o as we have seen r e c e n t l y , and (3) t h e r e was c a p i t a l f l i g h t from Europe d u r i n g t h e e a r l y s t a g e s due t o t h e w i d e s p r e a d d e f a u l t s o f European government debt t h a t a l s o impacted domestic p o l i c y f o r c i n g i n t e r e s t r a t e s lower even i f t h e Fed d i d n o t want t o see such a d e c l i n e . - The Fed c o u l d n o t l o w e r i n t e r e s t r a t e s t o s t i m u l a t e t h e economy. That w i l l o n l y h e l p d u r i n g b u l l markets where t h e r e i s " c o n f i d e n c e " t o i n v e s t f o r a p r o f i t i n any e v e n t . L o w e r i n g t a x e s d i d n o t r e a l l y m a t t e r because t h e r e was no p a y r o l l t a x u n t i l a f t e r W o r l d War I I and t h e r i c h were l o s i n g money p r o f u s e l y . I f i n d i t h a r d a f t e r j u s t r e a d i n g t h e memiors o f H e r b e r t Hoover and t h e s e r i o u s documentation a v a i l a b l e t o p r o v e t o me t h a t Keynes would have helped- The massive runs on banks t o o k p l a c e on rumors t h a t FES was g o i n g t o c o n f i s c a t e g o l d . He d e n i e d t h a t as absurd t h e n i g h t o f t h e e l e c t i o n . But t h e rumor p e r s i s t e d and l e d Co Tiassive bank r u n s . Hoover c o u l d n o t s t o p i t f o r i t was n o t a " c r e d i t " c r i s i s as much as i t was a sheer f l i g h t t o q u a l i t y . The m a j o r i t y o f banks f a i l e d a f t e r t h e e l e c t i o n o f FDR and h i s i n a u g u r a t i o n . Hoover w r o t e l e t t e r s t o FDR p l e a d i n g w i t h him t o r e a s s u r e t h e p e o p l e he had no such p l a n - But FDR remained s i l e n t . Had t h e Fed p r o v i d e d cash l o a n s t o t h e banks, i t would have been f r u i t l e s s . H i l t o n viewed t h e G r e a t D e p r e s s i o n from a money p e r s p e c t i v e . He was c o r r e c t , t h e f e a r s and u n c e r t a i n t y o f t h e t i m e s l e d t o b o a r d i n g o f g o l d . T h i s no doubt c o n t r i b u t e d t o what H i l t o n saw as a c o l l a p s e o f o n e - t h i r d o f t h e money s u p p l y d u r i n g t h e G r e a t D e p r e s s i o n . I t i s h a r d t o imagine p r e m i s i n g t o l o w e r t a x e s and i n t e r e s t r a t e s would have much i m p a c t when t h e w o r l d seems t o be ending.. I b e l i e v e i t was Abe L i n c o l n who argued t h a t you can f o o l seme o f the p e o p l e some o f t h e t i m e , b u t you c a n n o t f o o l a l l o f t h e p e o p l e a l l o f t h e t i m e . T h i s i s c l e a r l y a l e s s o n p o l i t i c i a n s need t o l e a m . The p e o p l e do l o o k t o t h e f u t u r e and w i l l spend more o f t h e i r income i f they " f e e l " t h a t t h e i r home i s r i s i n g i n v a l u e . When h o u s i n g p r i c e s d e c l i n e , s a v i n g s r i s e , because p e o p l e do i n f a c t respond t o t h e i r l o n g e r - t e r m e x p e c t a t i o n s . T h i s b r i n g s us t o t h e q u e s t i o n o f t a x c u t s and do t h e y even work? i n T964, a t a x c u t was made and t h i s was viewed as a permanent c u t I n p a y r o l l t a x e s . The economy e x p l o d e d and t h e r e was t h e g r e a t boom i n mutual funds t h a t l e d t o w i l d s p e c u l a t i o n w i t h t h e h i g h i n 1966. By t h e t i m e we see t h e c o l l a p s e , t h e r e was f e a r a b o u t i n f l a t i o n due t o t h e spending f o r t h e Vietnam War. i n I960 Congress passed what i t marketed a s a temporary t a x s u r c h a r g e t o s t o p i n f l a t i o n . T r u e , consumers spent l e s s , b u t they drew down s a v i n g s t o m a i n t a i n t h e i r consumption, i n 1975, t h e r e was t h e n a temporary t a x r e b a t e t o s t i m u l a t e t h e economy g o i n g i n t o t h e steep d e c l i n e f o r 1976. Hone o f t h e s e changes i n temporary t a x e s d i d a n y t h i n g s i g n i f i c a n t . Where t h e 1964 p a y r o l l t a x c u t t o o k p l a c e and was p e r c e i v e d as permanent, t h e r e we f i n d a s u r g e o f investment p l a n n i n g f o r t h e l o n g - t e r m as Friedman e x p e c t e d . The e m p i r i c a l e v i d e n c e s u g g e s t s t h a t one-time r e b a t e s w i l l n o t s t i m u l a t e t h e economy because t h e people a r e q u i t e f r a n k l y - not s t u p i d ! The o n l y h i s t o r i c a l e v i d e n c e o f a t a x c u t s t i m u l a t i n g t h e economy i s a permanent change not o n e - o f f s * '0

We a r e not concerned with t h e a b s u r d arguments that t h e a v e r a g e p e r s o n does n o t weigh t h e budget d e f i c i t when he i s b u y i n g eggs- These s o r t s o f c r i t i c i a n s m a l i g n t h e i n t u i t i v e n a t u r e o f t h e p e o p l e as a whole- F o r example, when P a u l V o l k e r r a i s e d i n t e r e s t rates t o unheard o f l e v e l s t o f i g h t i n f l a t i o n i n t h e e a r l y 1980s, my mother and her s i s t e r r a n o u t and bought CDS f o r 10 y e a r s a t f a h ^ ' w i f h i n t e r e s t r a t e s " o f about 15 percerTrT She did not ask"7ne"~anyadvtcn She i n s t i n c t i v e l y knew t h i s was a d e a l o f a l i f e t i m e . For t h e n e x t decade, they made a f o r t u n e - D i d t h e y weigh i n f l a t i o n r e l a t i v e t o t h e i n t e r e s t r a t e ? Perhaps. But they c l e a r l y d i d not see i n f l a t i o n as r i s i n g f a s t e r than the r a t e o f i n t e r e s t o r t h e y would have h e s i t a t e d a s was t h e c a s e d u r i n g t h * German H y p e r i n f l a t i o n . D i d t h e y have a model? Wo! D i d they make some i n s t i n c t i v e d e c i s i o n b a s e d upon n e r s o n a l o b s e r v a t i o n w i t h o u t e m p i r i c a l d a t a ? A b s o l u t e l y . Sorry, t r y i n g to impute knowledge t h a t must be somehow q u a n t i t a t i v e o n a p r o f e s s i o n a l l e v e l t o t h e g e n e r a l p u b l i c , makes no s e n s e . Sometimes we f o r g e t , that i f a i o n g h l i t t l e o l d l a d i e s r u n o a t a n d s h i f t t h e i r demand d e p o s i t s t o long-term f i x e d rates, t h e y do cause a c o n t r a c t i o n i n Ml a s we c a l c u l a t e o u r w o r l d M i l t o n was c o r r e c t - K e y n e s i a n models promote i n f l a t i o n w i t h no o b j e c t i v e . They a r e i n d i r e c t and may assume t h a t a n i n c r e a s e i n government s p e n d i n g w i l l be i n f l a t i o n a r y , b u t t h i s i s j u s t not always t r u e , i f there" a r e ' e x t e r n a l f a c t o r s t h a t a r e o f f s e t t i n g t h e s p e n d i n g such a s a c a p i t a l w i t h d r a w a l from o u t s i d e t h e d o m e s t i c economy. The assumption t h a t even w i t h i n a c l o s e d economy t h a t a n i n c r e a s e i n s p e n d i n g w i l l c r e a t e econcmic growth o f a t a n g i b l e n a t u r e i s a l s o f a l s e - j u s t l o o k a t t h e German H y p e r i n f l a t i o n . We saw t h e p e r i o d o f t h e 137B s t a r t o f i n f l a t i o n d e l i b e r a t e l y c r e a t e d and t a r g e t e d to i n c r e a s e .the money s u p p l y by o v e r v a l u i n g s i l v e r r e l a t i v e t o g o l d , f a i l e d t o produce t h e e x p e c t e d r e s u l t f o r g o l d was b e i n g d r a i n e d b y f o r e i g n i n v e s t o r s r e p l a c i n g i t w i t h s i l v e r u n t i l the e n t i r e experiment, led to J.P Morgan h a v i n g t o b a i l o u t the n a t i o n l e n d i n g t h e US T r e a s u r y g o l d . The d e l i b e r a t e c r e a t i o n o f money that was c h e a p e r t h a n t h e w o r l d s t a n d a r d , l e d not t o econcmic growth, b u t economic d e c l i n e i n a s i m i l a r f a s h i o n t o t h e German H y p e r i n f l a t i o n o f t h e 1920s, b u t t o a much l e s s e x t e n t Law #3 (Gresham's Law) BAD Money D r i v e s O u t Good
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W h i l e Gresham's Law was based upon a G o l d S t a n d a r d and t h a t b y debasingthe p r e c i o u s m e t a l c o n t e n t causes t h e h o a r d i n g o f h i g h e r c o n t e n t c o i n a g e , i n a f l o a t i n g exchange r a t e system, i t s t i l l works b y d r i v i n g r e a l w e a l t h o u t o f a n a t i o n f l e e i n g t o another currency by c r e a t i n g excess currency. Law #4 Only Permajynt R e d u c t i o n s i n Taxes Produce F<r.-rv*iiic S t i m u l a t i o r .

The average p e r s o n may not understand f a n c y s t a t i s t i c s , but t h e y w i l l a l s o n o t be i n d u c e d b y f a l s e s t a t i s t i c s . The average person r e a c t s a c c o r d i n g t o t h e i r own p e r s o n a l view o f the economy, w h i c h i s why o n e - o f f t a x r e d u c t i o n s w i l l n o t have a n economic impact b u t w i l l be hoarded f o r t h e r a i n y day u n l e s s t h e average p e r s o n "sees'* and " e x p e c t s ' econcmic changes.
1

i n t e r e s t R a t e s - Taxes - Money S u p p l y 5o i s t h a t t h e B e s t We have Got? As much a s I r e s p e c t M i l t o n Friedman, I must be honest. There a r e no p l a i n assumptions t h a t we c a n t o l e r a t e . We cannot assume t h a t v e l o c i t y w i l l remain a c o n s t a n t because p e o p l e w i l l hoard and f e a r s p e n d i n g in t i m e s o f econcmic d e c l i n e . L i k e w i s e , l e t u s not k i d o u r s e l v e s t h a t r a i s i n g and l o w e r i n g i n t e r e s t r a t e s w i l l have any m e a n i n g f u l e f f e c t upon t h e economy o r t h e b e h a v i o r o f i t s p a r t i c i p a n t s .

11

S e t t i n g a s i d e t h e a c c o l a d e s , t h e government c o u l d n o t h e l p b u t l o w e r i n t e r e s t r a t e s d u r i n g a n economic d e c l i n e . C a p i t a l w i l l f l e e t o government d e b t a s l o n g as i t p e r c e i v e s t h e r i s k t o be i n t h e p r i v a t e s e c t o r . Hence, c a p i t a l w i l l move t o t h e government d e b t b i d d i n g h i g h e r i n p r i c e f o r c i n g y i e l d s { i n t e r e s t r a t e s ) t o d e c l i n e . So K e y n e s i a n t h e o r y does n o t work. I t i s assuming government has " " s e m e " e f f e c t when i t i s n ~ 6 t ~ ~ i n 7 " t f i e ' ^ i V e r ^ e a t ^ I r ^ i ^ K e e p s " i n t e r e s t r a t e s so- " a r t i f i c i a l l y h i g h , p r i v a t e economic commerce w i l l c o l l a p s e and government e x p e n d i t u r e s would r i s e s h a r p l y due s o l e l y t o i n t e r e s t r a t e s c a u s i n g b o t h t h e money s u p p l y and economy t o c o l l a p s e . L o w e r i n g i n t e r e s t r a t e s b e l o w w o r l d l e v e l s a s d i d J a p a n i n t h e 1990s, f u e l s c a p i t a l f l i g h t t o h i g h e r y i e l d s p r e v e n t i n g d o m e s t i c i n c r e a s e s i n money s u p p l y d e f e a t i n g any i n t e n d e d s t i m u l a t i o n package. L i k e w i s e , i f money s u p p l y i s j u s t i n c r e a s e d assuming i t m a t t e r s n o t how i t i s i n c r e a s e d o r s p e n t , t h i s s o r t o f untargeted' w h o l e s a l e s p e n d i n g w i l l promote i n f l a t i o n causing c a p i t a l f l i g h t t o other lands. Currently, there a r e proposals t o spend money on i n f r a s t r u c t u r e - T h i s i s a t h r o w back t o R o o s e v e l t and t h e WPA. B u t t h i s d e m o n s t r a t e s how a l i t t l e - b i t o f knowledge c a n be dangerous. The WPA worked because unemployment r o s e t o 25% d u r i n g t h e G r e a t D e p r e s s i o n when we were s t i l l , 40% a g r a r i a n when t h e r e was a 7 year d r o u g h t known a s t h e D u s t Bowl . Government was s t i l l q u i t e s m a l l . The f e d e r a l r e s e r v e was c r e a t e d o n l y i n 1913 and t h e r e was t h e i n t e r s t a t e Commerce Commission. There was no p a y r o l l t a x and n o s o c i a l s e c u r i t y . Today, t h e growth i n government s t a t e and f e d e r a l has become n e a r l y t h a t 40% l e v e l . More government programs may k i l l t h e e n t i r e goose b r i n g i n g back t h e g o o d - o l d days and t h e c o m p l a i n t s a g a i n s t C o n s t a n t i n e t h e G r e a t (306-337AD) t h a t t h e r e were more - p e o p l e c o l l e c t i n g t a x e s t h a n p a y i n g them. F o r unemployment t o d a y t o r e a c h 25%, i t would r e q u i r e a c o l l a p s e i n governments t h r o u g h o u t t h e s t a t e s and m u n i c i p a l i t i e s . T h i s becomes p o s s i b l e because we have t h e f e d e r a l income t a x competing f o r revenue a g a i n s t t h e s t a t e and. l o c a l e n t i t i e s c a u s i n g t h e t a x b a s e t o c o l l a p s e . i n o u r mcdern-day economy, t h e k i n g has no c l o t h e s , b u t no one w i l l t e l l him. Money i s c r e a t e d by v e l o c i t y . T h i s i s agreed upon by a l l p e r s o n s . The l e v e r a g e i n t h e banks t h e y c r e a t e d w i t h t h e i r u n r e g u l a t e d d e r i v a t i v e s markets between themselves i s a t l e a s t 30:1. Our d e f i n i t i o n o f money i s f a r t o o narrow t o d a y . I t cannot be l i m i t e d t o demand d e p o s i t s and c a s h . I t must i n c l u d e bonds, s t o c k s , and a l l s u c h f i n a n c i a l i n s t r u m e n t s from money-market funds t o . d e r i v a t i v e s . I f we s t o p i g n o r i n g r e a l i t y , j u s t maybe we c a n f i g u r e o u t t h e r u l e s . I f d e r i v a t i v e s a r e n o t money, then.what were we s o s t r e s s e d about b a i l i n g o u t b a n k e r s ? I t i s n o t r e a l ! R i g h t ? P o o f ! I t ' s n o t t h e r e a s a magic t r i c k . We have t o s t o p d e f i n i n g money s o n a r r o w l y i f we r u s h t o b a i l o u t h o u s i n g , banks, and manufacture b u t none o f t h a t we c o n s i d e r money. So how do we f i x what we do n o t even d e f i n e p r o p e r l y ? Once we a c c e p t r e a l i t y and ask t h e average p e r s o n i f h i s house i s p a r t o f h i s a s s e t s he c o n s i d e r s w e a l t h , t h e n we w i l l r e a l i z e t h a t t h e t r u e p i c t u r e o f money I s what p e o p l e b e l i e v e i t t o be - n o t what economists c l a i m . T h i s i s why we a r e b a i l i n g o u t t f e n o r t g a g & - d e r i v a t i v e c r i s i s , because i t i s money. Hence, i f t h e e l e c t r o n i c money c r e a t e d by t h e p r i v a t e s e c t o r t h r o u g h v e l o c i t y i n c l u d e s t h e 30:1 l e v e r a g e , we c a n see t h a t i n c r e a s i n g t h e money s u p p l y t o compensate f o r t h e d e c l i n e i n t h e v e l o c i t y t h a t was e f f e c t e d by t h e 30:1 l e v e r a g e , b r i n g s i n t o f o c u s t h e problem o f money s u p p l y . There i s no way t o i n c r e a s e t h e government spending by 30 t i m e s t o o f f s e t t h e d e c l i n e i n v e l o c i t y . Even i f we l o o k a t a 10 f o l d i n c r e a s e , i t i s s t i l l f a r beyond what c o u l d be absorbed. T h i s t y p e o f a n i n c r e a s e i n money s u p p l y would be h y p e r i n l a t i o n a r y t o s a y t h e l e a s t . I t would be w i d e s p r e a d t h a t .everyone w o u l d be i n f l u e n c e d and c a p i t a l would t h e n r u n t o t a n g i b l e a s s e t s and f l e e government d e b t f o r c i n g t h a t a l s o t o go i n t o d e f a u l t o r j u s t be m o n e t i z e d . Because we a r e i n a g l o b a l economy, i f t h e F e d buys bonds t o i n j e c t c a p i t a l i n t o t h e economy, those bonds may be h e l d by f o r e i g n i n v e s t o r s who t a k e t h e money heme. I f we lower i n t e r e s t r a t e s s o f a r , c a p i t a l w i l l f l e e t o o t h e r l a n d s t o g e t t h e h i g h e r y i e l d a s what t o o k p l a c e i n Japan. We l i v e i n a whole new w o r l d .

The L a s t T o o l

Standing^

O b v i o u s l y , , we c a n n o t j u s t c r e a t e v a s t amounts o f c a s h and j u s t spend i t w i l d l y w i t h o u t c r e a t i n g a wave o f i n f l a t i o n t h a t would cause r e a l c a p i t a l and w e a l t h t o f l e e t o o t h e r l a n d s . We cannot a r t i f i c i a l l y r a i s e o r l o w e r i n t e r e s t r a t e s a g a i n s t t h e n a t u r a l t r e n d w i t h o u t e i t h e r c a u s i n g a competing f o r c e t h a t " a t t r a c t s c a p i t a l " o r " f u e l " s t h e " " a s s e t t n f i a t i o c n n c j r c a n we~drop i n t e r e s t r a t e s o r r a i s e them a r b i t r a r y t o w o r l d l e v e l s w i t h o u t c a u s i n g c a p i t a l t o f l e e f o r h i g h e r y i e l d s o r f o r e i g n c a p i t a l t o a r r i v e t a k i n g i n t e r e s t e a r n i n g s home d r a i n i n g d o m e s t i c r e s o u r c e s . I n t e r e s t r a t e s & money s u p p l y a r e s u b j e c t t o g l o b a l t r e n d s .
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T h i s i s 'why we have t h e New P r a c t i c a l "Laws" o f G l o b a l Economics. We a r e n o t a l o n e and w h a t e v e r we do w i t h money s u p p l y o r i n t e r e s t r a t e s c a n a t t r a c k o r r e p e l l b o t h d o m e s t i c and f o r e i g n c a p i t a l . We c a n n o t continue: under f a l s e a s s u m p t i o n s . We must f a c e r e a l i t y . Why d i d H i l t o n come l i s t e n t o me? Because where we may have d i s a g r e e d on t h e p r e s u m p t i o n t h a t t h e v e l o c i t y o f money was s t a b l e , we a g r e e d o n one p o i n t t h a t s t a n d s b e h i n d t h e s e "Laws" o f economics. M i l t o n saw t h a t a f l o a t i n g exchange r a t e system back i n 1953 would a c t a s a check and b a l a n c e upon t h e governments o f t h e w o r l d . Many c r i t i c i z e d M i l t o n and thought he was n u t s . B u t he was c o r r e c t * He saw i n t h e o r y i n T953 what I have w i t n e s s e d i n p r a c t i c e . T h i s i s were t h e o r y and o b s e r v a t i o n have met. Whatever we do, we w i l l e f f e c t t h e w o r l d j u s t a s t h e - w o r l d w i l l e f f e c t what we do. T h i s i s perhaps i m p l i c i t i n t h e " c o n t a g i o n " t h a t p e o p l e see a s t h e d e b t c r i s i s spread around t h e g l o b e l i k e t h e l a t e s t s t r a i n o f f l u .
:

The money s u p p l y and i n t e r e s t r a t e s a r e t r u l y c r e a t e d n o t by t h e man s i t t i n g behind t h e c u r t a i n i n Oz. I h e y a r e c r e a t e d by t h e i n t e r a c t i o n o f t h e p e o p l e and how they r e s p o n d t o b o t h p r i v a t e and p u b l i c e v e n t s t h a t impact t h e i r long-term and short-terra f i n a n c i a l e x p e c t a t i o n s . T h i s i s t h e essence o f t h e " f l i g h t t o q u a l i t y " d i c t a t e d by t h e I n v i s i b l e Hand, o f Adam S m i t h , who: w r o t e " i t i s n o t from t h e benevol e n c e o f t h e b u t c h e r ... t h a t we e x p e c t o u r d i n e r , b u t from [ h i s ] r e g a r d t o [ h i s ] own i n t e r e s t . " W e a l t h o f N a t i o n s , V o l I , p26-27 (Oxford: C l a r e n d o n e d . 1976). As a l r e a d y e x p l a i n e d , b o t h money s u p p l y and i n t e r e s t r a t e s cannot be c o n f i n e d t o p u r e l y d o m e s t i c i m p a c t . We cannot count o n t h e "benevolence" o f f o r e i g n i n v e s t o r s o r s t a t e s t o s i m p l y buy o u r d e b t t o s t i m u l a t e o u r economy c o n t r a r y t o t h e i r own s e l f i n t e r e s t s . We have t o r e s p e c t i n t e r n a t i o n a l c a p i t a l f l o w s o r we w i l l send o u r own economy back i n t o t h e s t o n e age. We cannot s t i m u l a t e domestic i s s u e s e x c l u s i v e l y by u s i n g p u r e l y i n t e r e s t r a t e s o r money s u p p l y t h e o r y by government s p e n d i n g . The l a s t d o m e s t i c t o o l s t a n d i n g i s t a x e s . Here t o o , we c a n r a i s e t a x e s and send c a p i t a l f l e e i n g t a k i n g w i t h i t j o b s . B u t we c a n l o w e r t a x e s t o c r e a t e j o b s d o m e s t i c a l l y as w e l l . T a x a t i o n i s a b a r b a r i c r e l i c . o f t h e p a s t t o i n c r e a s e t h e money supply o f t h e s t a t e ( k i n g ) l i k e war. a r e no l o n g e r o n t h e G o l d S t a n d a r d s o t h e r e i s no need t o t a x o r wage war f o r p r o f i t when money i s e l e c t r o n i c anyway, we must d i s t i n g u i s h t h a t s t a t e a l o c a l government need t a x a t i o n because they l a c k t h e power t o c r e a t e i t . They must l e a r n t o be c o m p e t i t i v e t o a t t r a c t j o b s , b u t t h e Feds no l o n g e r need inccane t a x e s . Honey can be c r e a t e d i n a d i s c i p l i n e d manner. M i l t o n even s u g g e s t e d a n e g a t i v e t a x r a t e t h a t was a n automatic: payment t o l o w e r income t h a t e n a b l e d a s t e a d y i n c r e a s e i n money s u p p l y . The p a y r o l l t a x m e r e l y borrows from: t h e p o o r e s t i n t e r e s t f r e e and t h e n hands back a r e f u n d a s i f i t were C h r i s t m a s . The 1964 t a x c u t was a permanent c u t and t h a t s p a r k e d economic growth. Oneoff t a x c u t s i n t r o u b l e d t i m e s never worked because when c o n f i d e n c e i s low, p e o p l e w i l l s a v e r a t h e r t h a n spend f o r t h e future. The o n l y v i a b l e t o o l we have i s t h e f e d e r a l income t a x . The o n l y way t o s p a r k a econcmic boom and c r e a t e j o b s , i s t o e l i m i n a t e i t and make American l a b o r c o m p e t i t i v e . The j o b s would pour back j u s t a s Hong Kong grew because i t had o n l y

13

a 15% t a x r a t e t h a t was l o w e r t h a n t h e r e s t o f t h e w o r l d . There a r e t h o s e who would assume t h a t i f government p r i n t e d t h e money i t needed t h a t t h a t would be i n f l a t i o n a r y . T h i s i s a m a t t e r o f d e f i n i t i o n . They f o r g e t t h a t we i s s u e t r i l l i o n s o f d o l l a r s t h r o u g h o u r b o r r o w i n g i n t h e form o f bonds. However, i f bonds, s t o c k s , r e a l e s t a t e and d e r i v a t i v e s a r e o u t s i d e o f o u r d e f i n i t i o n o f money, t h e n t h i s 1 8 t h c e n t u r y t h i n k i n g makes sense. S o r r y , i n t h e r e a l .world a bond i s s t i l l money. Between 1986 and 2006, t h e n a t i o n a l debt r o s e frcan about 32.1 t r i l l i o n t o J8-.5 t r i l l i o n . T h i s t o o k p l a c e n o t i n p r i n t i n g money, b u t i n bonds. I n f a c t , we were f o r c e d t o i s s u e more d e b t j u s t t o pay t h e i n t e r e s t on d e b t . The i n t e r e s t payments f o r t h i s 20 year p e r i o d was $6,141 t r i l l i o n . Had we p r i n t e d t h e d e f i c i t between t a x a t i o n and s p e n d i n g ( e x c l u d i n g i n t e r e s t ) > t h a t would have amounted- t o o n l y $259 b i l l i o n a f a r c r y from t h e b a i l o u t s . I f we a r e a l r e a d y c o m m i t t i n g b i l l i o n s i f n o t beyond 1 t r i l l i o n f o r r e s c u e , we cannot a f f o r d t o borrow o h t o p o f t h i s . The v e r y i d e a t h a t we borrow money r a t h e r t h a n p r i n t i t i s somehow l e s s i n f l a t i o n a r y i s absurd and a throw-back t o t h e G o l d S t a n d a r d when n a t u r e c o n t r o l l e d t h e ' q u a n t i t y o f money. S p a i n borrowed h e a v i l y o n t h e g o l d i t e x p e c t e d from A m e r i c a . When i t s t r e a s u r e s h i p s d i d n ' t show up and i t l o s t t h e S p a n i s h Armada a g a i n s t E n g l a n d , t h e d e f a u l t d e s t r o y e d t h e bankers i n V e n i c e and r e l e g a t e d b o t h S p a i n and I t a l y to- a l m o s t t h i r d w o r l d s t a t u s . The S p a n i s h I n q u i s i t i o n m e r e l y caused t h e jews t o f l e e t o H o l l a n d t r a n s f e r r i n g banking to N o r t h e r n Europe.- We. cannot a f f o r d t h e same m i s t a k e s . S o r r o w i n g i s a a n c i e n t t r a d i t i o n when t h e r e was ho o t h e r c h o i c e . The G o l d S t a n d a r d & C r o n i c S h o r t a g e o f & m e y They s a y h i s t o r y i s b i a s e d - f o r i t i s w r i t t e n by t h e v i c t o r . But. we c a n a l s o remember t h i n g s o f days l o n g s i n c e p a s t w i t h r o s e - c o l o r e d g l a s s e s . Some see g o l d a s a l m o s t a r e l i g i o n - t h e s a v i o r t h a t w i l l d e l i v e r ;us from t h e e v i l o f i n f l a t i o n . T h a t i s j u s t n o t t r u e . The boom-bust c y c l e e x i s t e d i n .ancient t i m e s as w e l l and always we f i n d no m a t t e r what system i s i n p l a c e , t h e r e i s . someone who .always spends t o o much. The G o l d Standard was a w o r l d t h a t was n o t s o s i m p l i s t i c . I n a n c i e n t t i m e s , i t p r o v i d e d t h e i n c e n t i v e f o r war - t h e b e s t way t o i n c r e a s e money s u p p l y . I n f a c t , one o f t h e r e a s o n s t h e r e a r e s o many a n c i e n t c o i n s t h a t have s u r v i v e d i s t h e r e was t h e p r a c t i c e o f b u r y i n g t h e p a y r o l l b e f o r e b a t t l e s o t h a t t h e o t h e r s i d e was d e n i e d t h e s p o i l s o f war. The G o l d S t a n d a r d a l s o meant t h a t t h e way t o c r e a t e more money was t h r o u g h r e d u c i n g t h e m e t a l c o n t e n t - d e b a s i n g t h e q u a l i t y o f t h e m e t a l . Those who were l o o k i n g t o be d i s h o n e s t had two o p t i o n s - {1) c o u n t e r f e i t i n g , o r (2) c l i p p i n g . Take a c o i n o u t o f y o u r p o c k e t and you w i l l see r e e d i n g o n t h e edges o f a n American dime o r q u a r t e r f o r example. T h i s was a n o l d a n t i - c l i p p i n g device- t h a t was t o p r e v e n t t h o s e who would shave a l i t t l e o f f o f e v e r y c o i n - c o l l e c t i n g a p i l e o f s c r a p m e t a l . T h i s gave r i s e t o banks i s s u i n g n o t e s t o a t f i r s t guarantee t h e payment i n t h e proper amount o f p r e c i o u s m e t a l s o f gocd c u r r e n c y meaning u n d i p p e d coinage. However, t h e g r e a t e s t problem w i t h t h e Gold, S t a n d a r d was t h e i n a b i l i t y t o c r e a t e money o t h e r t h a n war, a l t e r i n g c o n t e n t s , o r c h a n g i n g t h e r a t i o o f s i l v e r t o g o l d a s t h e s i l v e r Democrats t r i e d i n t h e l a t e 1300s. The money s u p p l y was i n t h e hands o f n a t u r e and t h u s was s u b j e c t t o boom and b u s t c y c l e s based a l s o upon t h e d i s c o v e r y o f m e t a l . The C a l i f o r n i a Gold. Rush o f 1849 c o n t r i b u t e d t o t h e economic boom t h a t l e d t o t h e P a n i c o f 1957. The d i s a d v a n t a g e o f t h e G o l d S t a n d a r d was t h e i n a b i l i t y t o c r e a t e a steady new s u p p l y o f money t o keep p a c e w i t h t h e growth i n p o p u l a t i o n and economic

T4

needs. G o i n g back t o t h e G o l d S t a n d a r d i s n o t t h e answer t o l o n g - t e r m economic growth n o r w o u l d i t s o l v e t h e c u r r e n t economic c r i s i s . I n f a c t , i t would c r e a t e an economic c o n t r a c t i o n t h a t would end f l e x i b i l i t y t o e v e n d e a l w i t h t h e problem. T h i s i s s e p a r a t e and d i s t i n c t i n s o f a r as g o l d p r o v i d i n g a p r i v a t e s o u r c e o f -wealththat-remains ar s t o r e o f - v a l u e . The r e a s o n - g o l d emeriged-as-iiioney-because i t was a v a l u e d commodity and r e c o g n i z a b l e i n a l l l a n d s . They use g o l d f o r j e w e l r y i n I n d i a and C h i n a t h e same way t h e y use i t i n R u s s i a , Europe, o r t h e A m e r i c a s . I t i s a s c a r c e commodity t h a t t h e r e would n o t be .enough o f i f e v e r y p e r s c n i n the w o r l d wanted j u s t 1 ounce f o r t h e m s e l v e s , whether o r not g o l d i s t h e " o f f i c i a l " monetary u n i t o r t h e check a g a i n s t f i s c a l i r r e s p o n s i b i l i t y i s o f no i m p o r t a n c e . I n the s p i r i t of l i b e r t y , a l l o w i n g g o l d t o ranairi as the p r i v a t e s t o r e o f wealth i s f a r b e t t e r . That was t h e v e r y i s s u e t h a t R o o s e v e l t sought t o e l i m i n a t e - t h e a b i l i t y t o h o a r d g o l d as a hedge a g a i n s t government. T h i s i s a l s o why R o o s e v e l t c o n f i s c a t e d g o l d so he c o u l d d e v a l u e t h e d o l l a r r e l a t i v e t o g o l d t h e r e b y any s u c h p r o f i t would d e f a u l t t o t h e government - n o t t h e i n d i v i d u a l h o a r d i n g t h e g o l d .
1

A l l t h e problems w i t h t h e G o l d S t a n d a r d emerged- from t h e i n a b i l i t y t o c r e a t e money when needed. M i l t o n argued t h a t t h e d e f i c i t s p e n d i n g advocated by Keynes would l e a d t o o n l y i n f l a t i o n r a t h e r t h a n econcmic growth. I n e e d , Keynes h i m s e l f d i d n o t advocate p e r p e t u a l d e f i c i t s p e n d i n g y e a r a f t e r y e a r . Once t h e government r e c e i v e d h i s b l e s s i n g , t h e y j u s t r a n w i t h t h e b a l l , b u t t h e g o a l - p o s t was p a s t decades ago. L o o k i n g a t t h e F e d e r a l budget s i n c e 1 936, t h e o n l y y e a r s i n w h i c h t h e r e was n o t a d e f i c i t were f a r and few between: 7947, 7948, 1949, 195], 1956, 1957, 1960, 1969, 1998, 1999, 2000, 2001

D u r i n g t h e 72 y e a r s between 1936 and 2008, t h e r e were o n l y 11 y e a r s t h a t p r o duced a budget s u r p l u s . T h i s i s n o t a v e r y good r e c o r d f o r K e y n e s i a n economics. Once t h e c o n c e p t o f d e f i c i t spending was i n t r o d u c e d by Keynes, i t was s e r i o u s l y abused. B u t t h e problem was not so much t h e d e f i c i t , b u t t h e f a c t t h a t a t t h e same t i m e t h e r e was t h e p r e t e n s e o f m a i n t a i n i n g a G o l d S t a n d a r d a t a f i x e d q u a n t i t y o f d o l l a r s t o an ounce o f g o l d w h i l e t h e s u p p l y o f d o l l a r s was b e i n g i n c r e a s e d and t h e g o l d s u p p l y was d e c l i n i n g . T h i s c u l i r d n a t e d i n t h e f i r s t b r e a k w i t h t h e t w o - t i e r G o l d S t a n d a r d whereas g o l d began t o t r a d e on t h e London exchanges f r e e l y , t h a t was f o l l o w e d by t h e c l o s i n g o f t h e g o l d window i n 1971 when there- were more c o l l a r s t h a n g o l d t o redeem them. The r e a l i t y o f p e r p e t u a l d e f i c i t spending under t h e G o l d S t a n d a r d came home w i t h s h o c k i n g f o r c e . The Bottom L i n e . A r b i t r a r y spending even on i n f r a s t r u c t u r e w i l l do n o t h i n g b u t c r e a t e p e r c e i v e d i n f l a t i o n b e f o r e i t even h i t s t h e economy. The work programs o f t h e G r e a t D e p r e s s i o n made sense o n l y because t h e r e was a n a t u r a l d i s a s t e r i n t h e form o f t h e Dust Bowl t h a t l a s t e d 7 y e a r s . I t i s t r u e t h a t unemployment r o s e t o 25%. However, i t was o n l y 8.9% i n 1930 deep i n t o t h e s t a r t o f t h e D e p r e s s i o n . I t r e a c h e d above 20% o n l y when t h e Dust B c w l d e s t r o y e d j o b s g i v e n we were s t i l l 40% a g r a r i a n i n o u r work f o r c e , unemployment began t o d e c l i n e w i t h 1935:20.3%, 1936 16.9%, 1937 14.3%, 1938 19% and 1939 17.2%, but as you can see, we have a s e l e c t e d memory f o r what r e a l l y worked and what d i d n o t . Unemployment i n 1940 s t o o d a t 14.6% and a t t h e end o f World War I I , i t was 1,9%. I t was n o t t h e WPA t h a t changed t h e economy, i t was t h e war. T h i s has l e d t o some c l a i m i n g a l s o ' s e l e c t i v e l y t h a t war i s good f o r t h e economy. We began t h e f i r s t peacetime d r a f t i n 1940 t h a t was approved on September 14, 1940 b u t i t was P e a r l Harbor on December 7 t h , 1941 t h a t o f f i c i a l l y s t a r t e d t h e war f o r Americans t h e n d e c l a r e d war a g a i n s t Japan on December 8 t h f o l l o w e d by a d e c l a r a t i o n a g a i n s t Germany and I t a l y on December 11 t h , 1 941. 15

The WPA was i n s t i t u t e d May 6 t h , 1935. I t p r o v i d e d a v i t a l r o l e i n c r e a t i n g j o b s n o t l o s t b y the c r e d i t c r i s i s i n t h e f i n a n c i a l markets, h u t by t h e Dust Bowl. The c o l l a p s e o f t h e A u s t r i a n C r e d i t - A n s t a l t i n Hay 1.931, began a c r e d i t c r i s i s c o n t a g i o n t h a t swept t h e w o r l d c r e a t i n g a wave o f b u s i n e s s f a i l u r e s as we a r e s e e i n g t c d a y w i t h G e n e r a l " M o t o r s , unemployment was the w o r s t i n Germany h i t t i n g 5.5 m - n i i n n in-1932.-lAiie.Britein^was _2._7 m i l l i o n . These were t h e c o n d i t i o n s t h a t n o t m e r e l y l e d t o t h e e l e c t i o n o f R o o s e v e l t i n 1933, b u t A d o l f H i t l e r a l s o i n 1933, From t h e September s a n c t i o n o f Germany i n 1936 b y B r i t a i n and F r a n c e , i t was b u t o n l y a b o u t 3.141 y e a r s l a t e r t o P e a r l H a r b o r . The US h a d d e c l a r e d I t s n e u t r a l i t y i n Europe o n September 5 t h , 1939 when Germany invaded P o l a n d . T t wes t h e war and not o u r p a r t i c i p a t i o n t h a t ended the d e p r e s s i o n , b u t we became t h e arms and f o o d d e a l e r s f o r Europe. By t h e end o f t h e war, t h e US s t o o d w i t h 76% o f w o r l d g o l d r e s e r v e s . T h a t created. American w e a l t h - n o t p o l i c y o r even; peacetime t r a d e ,
n

Tcday, i f we wage war, we spend o u r r e s o u r c e s and t h e economy d e c l i n e s much as what t o o k p l a c e i n Europe. Wax i s good f o r t h e economy, o n l y when y o u a r e t h e _ a j f c d e a l e r , n o t t h e a g g r e s s o r . Today, t h e work f o r c e i s n e a r l y 150 million. I f we s u b t r a c t t h e a g r i c u l t u r a l s e c t o r from t h e G r e a t D e p r e s s i o n , unemployment h i t a t about 10%. S i n c e 1995, t h e US unemployment r a t e i s between 41-6%. B u t t h i s i s a l s o n o t a f a i r v i e w o f t h e economy. As o f 2005, f e d e r a l government c i v i l employment i s about 2.7 m i l l i o n . The m i l i t a r y .personnel i s about 500,000 (Army), 54,000 (Navy), 353,000 ( A i r F o r c e , and 20,000 (Marines) w i t h about 41,000 (Coast G u a r d ) . T h i s b r i n g s t h e f e d e r a l government consumption o f l a b o r t o about 3.7 m i l l i o n o r a b o u t 2.4% o f t h e c i v i l work f o r c e . O u t s i d e t h e G r e a t D e p r e s s i o n , t h e w o r s t bout o f uneH^loyment came i n 1975 when i t h i t 8.5% and d i d n o t d r o p b e l o w 7% u n t i l 1987, The peak d u r i n g t h e economic d e c l i n e between 1950 and 1935 took p l a c e i n 1985 a t a b o u t 7 . 2 % . We d i d s e e 7.5% f o r 1992 t h a t l e d t o a b r i e f p o p u l a r movement f o r Ross P e r o t and t h e v i c t o r y o f B i l l C l i n t o n i n t h e P r e s i d e n t i a l e l e c t i o n s . To r e a c h 25% t c d a y , we would s e e sweeping p o l i t i c a l changes and m a s s i v e p o l i t i c a l u n r e s t . I t would be i m p o s s i b l e w i t h o u t t h e c o l l a p s e o f s t a t e and l o c a l governments s i n c e we s e e t h a t a g r i c u l t u r e a c c o u n t s o n l y f o r a b o u t 3% c u r r e n t l y . The DS G r o s s Domestic Product ("OJP"i i s now a b o u t S15 t r i l l i o n a n n u a l l y . I f we assume t h e h i g h Hrfa o f a budget f o r one y e a r w i l l b e $3 t r i l l i o n , t h e t o t a l f e d e r a l t a x c o l l e c t e d s t a n d s a t about 17% o f t h e GDP, T f we s p e n t t h a t same amount o f money o n i n f r a s t r u c t u r e , b y the t i m e t h a t f i l t e r s i n t o t h e economy, t h e e f f e c t w o u l d be t o c l i t t l e - t o o - l a t e . We would need a n o t h e r l a y e r o f o v e r s i g h t and c o s t s t o even a d m i n i s t e r such a p r o j e c t . I f we s i m p l y e l i m i n a t e t h e f e d e r a l t a x c o l l e c t i o n , t h a t would be an immediate s h o t i n t h e arm. But t h i s t o o would f a l l s h o r t u n l e s s t h e p e o p l e s e e t h i s a s a permanent r e d u c t i o n . Companies w o u l d n o t r e l o c a t e f o r a mere o n e - o f f r e d u c t i o n . What we need i s a three-punch s o l u t i o n . We a l r e a d y know t h a t i n t e r e s t r a t e s and w h o l e s a l e i n c r e a s e s i n the money s u p p l y w i l l n o t be l i m i t e d i n scope t o the domestic economy, whatever we do t o r e l i e v e t h e economic p r e s s u r e (lower i n t e r e s t r a t e s - o r - i n c r e a s e s p e n d i n g ) , i s more l i k e l y t o Cause f o r e i g n c a p i t a l t o f l e e . T h i s w i l l f u r t h e r c o n t r a c t t h e d o m e s t i c money s u p p l y and would most l i k e l y p r o l o n g t h e economic d e p r e s s i o n . We must c o n s i d e r what seems t o be t h e most r a d i c a l s o l u t i o n , b u t i n 2 1 s t C e n t u r y economics i n s t e a d o f 1 6 t h C e n t u r y , i t i s f a r more t a r g e t e d and p r a c t i c a l . I f we e l i m i n a t e t h e f e d e r a l income t a x and s t o p t h e b o r r o w i n g , we c a n jump s t a r t t h e economy and p r o v i d e t h a t b o o s t t o c o n f i d e n c e t h a t t h e permanent tax c u t d i d i n 1964 compared t o t h e u n s u c c e s s f u l o n e - o f f t a x c u t s t h a t went more t o i n c r e a s e savings than srending. Ws cannot l o s e s i g h t o f t h e f a c t t h a t t h e f e d e r a l government i s now a l s o c c m p e t i n g f o r t a x d o l l a r s a g a i n s t t h e s t a t e s and c i t i e s who a r e now i n t r o u b l e

and cannot c r e a t e money a s t h e f e d e r a l government c a n do. U n l e s s we now c o n s i d e r a 2 1 s t Century d e f i n i t i o n & s o l u t i o n , t h e n t h e 18'th C e n t u r y t h e o r i e s w i l l c o v e r the s p e c u l a t i v e l o s s e s f o r i n v e s t m e n t banks, n o t W a l l S t r e e t , and c r e a t e o n l y work programs f o r s t o c k b r o k e r s and programmers t o l e a r n how t o f i x b r i d g e s and roads. T h a t seems one way t o lower s k i l l s o p p o s i t e o f the p o l i c y o f the- WPA i n 1935. i i . I i T i i n a ^ i n g - -Federal-iHeotae-Tax.

{1) W i l l s i g n a l a permanent and immediate change t o t h e p u b l i c r e s t o r i n g " c o n f i d e n c e " i n t h e future and w i l l r e s u l t i n immediate economic r e l i e f . (2) W i l l s h i f t t h e t a x t o make d o m e s t i c l a b o r cheaper whereby c o r p o r a t i o n s who move o f f s h o r e would then be s u b j e c t t o t a r i f f s and e x c i s e t a x e s but not on d o m e s t i c l a b o r depending upon what n a t i o n t h e y moved t o . (3) E l i m i n a t e the c o m p e t i t i o n with the .states ft l o c a l government that w i l l o n l y be p e t i t i o n i n g f o r b a i l o u t s of t h e i r own, f o r as r e a l estate- p r i c e s decline,'the t a x base w i l l implode c r e a t i n g a c c n t r a c t i o n i n revenues f o r c i n g t h e s t a t e s and l o c a l government t o ; l a y o f f w o r k e r s . 14) E l i m i n a t e t h * h i g h c o s t s o f c o l l e c t i n g t a x e s we do n o t need due t o the e v o l u t i o n o f what we d e f i n e a s money. [5) E l i m i n a t e t h e c o s t and d e l a y i n creating a new a d r r i i n i s t r a t i o n . t o o v e r s e e some s o r t o f program t h a t would t a k e y e a r s t o a c t u a l l y produce any economic e f f e c t , whereas s i m p l y r e t u r n i n g what was r e c e i v e d i n income t a x e s [not s o c i a l s e c u r i t y ) i s a c l e a n way t o jump-start the economy - i m m e d i a t e l y ! a.) To those who w i l l a r g u e Marx's p h i l o s o p h y t h a t t h e r i c h w i l l g e t more, w e l l they a l s o p a i d more, and i t i s the concentration of c a p i t a l that creates the p o o l o f funds t h a t banks t h e n l e n d t h a t w i l l e l i m i n a t e t h e c r e d i t c r u n c h . I f someone has $1 b i l l i o n i n c a s h and he i s now e n t i c e d t o d e p o s i t i t w i t h a bank because we a l i o w i l l e l i m i n a t e t h e $100,000 FDIC l i m i t a t i o n t h a t p r e v e n t s b i g money from b e i n g l e n t o u t and m e r e l y i n s u r e a l l d e p o s i t s because we i n s t a l l b e t t e r r e g u l a t i o n t o p r e v e n t gaps w i t h unprecedented l e v e r a g e , t h e n we s h o u l d have no problem s e c u r i n g a l l d e p o s i t s , t h a t w i l l s u d d e n l y a t t r a c t - a c i t a l from around t h e w o r l d a s w e l l . T h i s w i l l b e n e f i t t h e a v e r a g e wage e a r r e r and s t o p t h e Marxism t h a t caused b o t h R u s s i a and C h i n a t o see t h e l i g h t t h a t we remain b l i n d , p r e f e r r i n g t o l i v e i n t h e d a r k . I I . J E l i m i n a t e t h e N a t i o n a l Debt By M o n e t i z a t i g n (1) FDR c o n f i s c a t e d g o l d s o he c o u l d d e v a l u e t h e d o l l a r . T h i s was l i m i t e d t o t h e t i m e s because we were s t i l l on a G o l d S t a n d a r d . By m o n e t i z i n g t h e d e b t , we would h o t c r e a t e a d r a m a t i c change i n i n f l a t i o n because i n t h e r e a l w o r l d , when we i s s u e bonds, we may n o t d e f i n e t h a t a s "money" i n terms o f M1, b u t i n t h e p r a c t i c a l p e r s p e c t i v e , we l o o k a t how much we owe and judge t h a t a s money i s s u e d r e g a r d l e s s o f what we c a l l i t . (2) Between 1986 and 2006, t h e i n t e r e s t e x r e n d i t u r e s t o keep t h e d e b t i n p l a c e accounted f o r almost 72% o f t h e i n c r e a s e i n t h e d e b t . We a r e f u n d i n g o u r mortgage w i t h a v i s a c a r d . 17

(3) Those who b e l i e v e t h a t t h i s would be i n f l a t i o n a r y a r e j u s t m i s g u i d e d f o r t h e m a r k e t p l a c e a l r e a d y sees t h e same amount o f d o l l a r s h e l d as a s s e t s i n t h e form o f bonds and r e p l a c i n g t h a t same amount w i t h d o l l a r s w i l l save as we have seen 72% o f t h e o v e r a l l growth i n d e b t t h a t we c o u l d never repay i n _any e v e n t , and no government a c t u a l l y b e l i e v e s they w i l l i n f a c t pay o f f t h e i r ' d e b t f o r t h a t would be a c o n t r a c t i o n o f money s u p p l y unprecedented t o d a t e . ;A) E l i m i n a t i n g t h e I n s u r a n c e L i m i t a t i o n a t t h e FDIC (1) There i s no r e a s o n why we s h o u l d not. i n s u r e a l l d e p o s i t s i n commercial banks, f o r t h i s would r e p l a c e government d e b t and make v a s t s o u r c e s o f c a s h a v a i l a b l e f o r l e n d i n g and would e l i m i n a t e the c r e d i t crunch overnight. (2) I f we i n s u r e a l l commercial bank d e p o s i t s , t h i s w i l l a l s o a t t r a c t foreign c a p i t a l increasing the c a p i t a l reserves f o r lending. (3) Investment Banks s h o u l d be e x c l u d e d f o r t h e y a r e h i g h e r r i s k and not p a r t o f t h e " r e a l " c c m n e r i c a l network w i t h l o c a l branches t h a t s e r v i c e t h e community. Those who w i s h t o d e a l w i t h such banks s h o u l d a l s o s u f f e r t h e h i g h e r r i s k f o r h i g h e r yield a. ) There must be a s i n g l e r e g u l a t o r y body w i t h no gaps i n t h e r e g u l a t i o n where t h e g r e a t e s t danger has h i s t o r i c a l l y been the leverage. b. ) There must be t r a n s p a r e n c y and o n l y o p e n l y r e g u l a t e d exchanges where c o u n t e r - p a r t i e s must have t h e a s s e t t o s u p p o r t t h e p o s i t i o n , n o t mere r e p u t a t i o n . (B) S o c i a l S e c u r i t y Reform {1) By e l i m i n a t i n g t h e b o r r o w i n g and t a x a t i o n a t t h e f e d e r a l l e v e l c o n s i d e r i n g t h e income t a x ( d i r e c t t a x a t i o n ) , t h i s w i l l a l s o a u t o m a t i c a l l y r e h a b i l i t a t e t h e s o c i a l S e c u r i t y program and make t h i s i n t o a r e a l s a v i n g s p l a n t h a t would t h e n I n v e s t t h e funds becoming a n a t i o n a l w e a l t h fund t o a l s o e n a b l e i t t o f a c e t h e e n t i t l e m e n t s coming sooner than l a t e r where t h e p u b l i c a l s o have l o s t f a i t h i n ever seeing a r e a l d o l l a r .
:

(2) Once f r e e d from t h e i n v e s t m e n t i n government bonds, t h i s fund can c r e a t e tremendous economic p r o g r e s s f o r t h e f u t u r e by even a l l o c a t i n g 3% f o r v e n t u r e c a p i t a l i n s i z a b l e new i n n o v a t i o n s t h a t w i l l g r e a t l y advance m e d i c i n e , s c i e n c e , and t e c h n o l o g y . III.) N a t i o n a l H e a l t h - C a r e Program (1) We need t o e s t a b l i s h a n a t i o n a l h e a l t h - c a r e program f o r a l l t h a t w i l l r e l i e v e t h e c o n i n g c r i s i s i n p e n s i o n funds o f c i t i e s , , s t a t e s , f e d e r a l government, and c o r p o r a t e A m e r i c a . The c o s t s a r e so s t e e p , even s e r v i c e j o b s a r e l e a v i n g f o r a s a l a r i e d employee c o s t i n g $50,000, ends up c o s t i n g on average $125,000 between t a x e s and h e a l t h - c a r e a l o n g w i t h p e n s i o n c o s t s .

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(2) we must f a c e t h e f a c t s , t h a t t h e purpose o f s o c i e t y i s t h e c o o p e r a t i v e e f f o r t s o f s o c i e t y t o seek l o w e r c o s t s and s e c u r i t y , n o t much d i f f e r e n t why p e o p l e were w i l l i n g t o be a s e r f so that when danger came they got t o r u n b e h i n d the w a l l of the castle.
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(3) A n a t i o n a l h e a t h - c a r e program i s v i t a l t o o u r s u r v i v a l f o r the costs are r i s i n g so r a p i d l y , corporates a r e passing those c o s t s on t o employees and t h e q u a l i t y o f l i f e i s c o l l a p s i n g . (4) Ate must stop t h e nonsense, p a s s t o r t - r e f o r m , s t o p t h e c r a a y l a w s u i t s , and t h e c o s t s w i l l ccme back i n l i n e t o where they once were 20 y e a r s ago when s m a l l companies handed o u t h e a l t h c a r e t h a t c o v e r e d t h e whole f a m i l y o f e v e r y worker. The l a w y e r s w i l l f i n d another a r e a t o e x p l o i t , o r perhaps t h e y t o o have t o t i g h t e n t h e i r b e l t f o r the good o f t h e nation b e f o r e we d o n ' t have one anymore. (5) E l i m i n a t e t r a d e b a r r i e r s t o cheaper drugs from Canada and f o r c e them back i n lin as w e l l . T h i s i s o u r f u t u r e we a r e t a l k i n g about, we have seen what t h e i n v e s t m e n t bankers d i d t o t h e economy with t h e i r outrageous l e v e r a g e and u n r e g u l a t e d shadow markets, l e t us n o t w a i t u n t i l h o s p i t a l s c l o s e because p e o p l e c a n no l o n g e r a f f o r d h e a l t h - c a r e .
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(6) We need u r g e n t a t t e n t i o n f o r a s unemployment r i s e s , c h i l d r e n w i l l new d i e f o r t h e "greed" o f t h i s ; i n d u s t r y i s d e s t r o y i n g the v e r y t h i n g t h e y c l a i m to be p r o t e c t i n g . 6 UHW A T TON

T h i s t h r e e - p u n c h s o l u t i o n i s c r i t i c a l t o o u r s u r v i v a l . We must r e s p e c t t h a t t h e r e a r e j u s t some tiroes i n h i s t o r y that we h a v e a c h o i c e t o make a r e a l e f f o r t t o change t h e t r e n d , o r t o b u l l s h i t o u r way around t h e f a c t s o n l y t o . postpone t h e r e a l i t y , wo one e x p e c t s t h e n a t i o n a l debt t o ever be p a i d . We c a n c o n t i n u e t o l i v e i n o u r 1 8 t h C e n t u r y w o r l d and p r e t e n d t h a t i f we p r i n t t h e money i t w i l l be some how more i n f l a t i o n a r y t h a n p r i n t i n g bonds and s p e n d i n g 72% more t o keep them g o i n g when t h e r e i s no p l a n t o e v e r r e t i r e than anyway. I t i s time t o c r e a t e a c o n t r o l b u m b e f o r e we e x p l o d e from o u r own nonsense. I t i s n o t t o l a t e t o save t h e day. P u t we have t o s t a r t t o make r e a l i s t i c p l a n s and address t h e h o n e s t i s s u e s . The i n v e s t m e n t Bankers have blown-up t h e i r w o r l d as t h e y always do. They have never g o t it r i g h t e v e n once! They c r e a t e models t h a t i g n o r e the b i g e v e n t s because they thought they don't happen that o f t e n . Well i t happened and now t h e y a r e begging t o cover t h e i r l o s s e s . H e a l t h c a r e and t h e wave o f e n t i t l e m e n t s i s g o i n g t o h i t shore lik a tsunami. A r e we g o i n g t o j u s t once p l a n f o r t h e f u t u r e , o r i s democracy t h e w o r s t k i n d of government because t h e r e i s t o o much t a l k and no a c t i o n ? ! J u s t f o r i o n c e , l e t u s e update o u r d e f i n i t i o n o f what i s money and we w i l l s e e t h a t p r i n t i n g ! d o l l a r s o r bonds i s r e a l l y t h e same t h i n g e x c e p t bonds a r e t h e g i f t t h a t we keep h a v i n g t o pay f o r g e n e r a t i o n a f t e r g e n e r a t i o n . End t h e s t u p i d b o r r o w i n g , We are not i n d z anymore. G o l d i s n o t money. L e t u s ' s t a r t u n d e r s t a n d i n g t h e modern w o r l d we l t v e l i o t o d a y . M a r t i n A. Armstrong A r m s t r o n g E c o n o m i c s ^ G ^ l l . ccm T9