no third solution

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Category Archives: Economics Lessons

SEC Outlaws Interpersonal Loans

November 27th, 2008

Citing a TechCrunch article indicating that the SEC is shutting down Prosper.com, Jason Kolb comments on The Money Mafia known as the Federal Reserve system. There is some merit to what he has to say, but I think he overlooks the most important points. I wasn’t able to leave a comment at Jason’s post for some reason, but I was going to respond here anyways.

To review, Prosper.com is a peer-to-peer lending network which matches people who need money, with people who have money to lend. According to the TechCrunch article, the SEC claims that Prosper was selling investments, or could reasonably be construed by the layperson as selling investments, and therefore needs to cease and desist until registering with the SEC and falling under its regulatory umbrella. Prosper, as you might imagine, has maintained all along that it is not selling investments, it’s merely facilitating the free exchange of inter-personal loans.

Kolb comments,

The key here is that Prosper itself was not lending or borrowing, it was simply matching up willing borrowers and willing borrowers. It also provided additional services such as collection and tracking.

As far as I’m aware, this is all true. They charged a nominal fee for this service, just like eBay charges a nominal listing fee for its service: matching buyers and sellers. On eBay, the goods for sale are generally tangible. On Prosper, the “goods” for sale are interpersonal loans. The people lending money through prosper are not purchasing a security, an “investment” from Prosper.

Kolb is correct when he says, in regards to this case, “The SEC is simply acting as the enforcement arm of our private national banking cartel (emphasis in original)”, however, I think he misunderstands the nature of a central banking cartel, or at the very least, grossly overestimates the ability of individuals beholden to a banking cartel, to extricate themselves from its stranglehold by using its funny money.

The real fact is, if private citizens were allowed to freely lend to one another, the private banking cartel that is our central banking system would lose the little control they have over the economy.

Wrong. Prosper.com attempts to work within the current, broken monetary system.

As long as people are coerced into using FRNs, which can be inflated at will, the banking cartel to which he alludes maintains enough control of the monetary system to make sites like Prosper essentially a novelty. The fact of the matter is that the individual, lending on prosper, is simply not permitted to create money out of thin air in the same manner as the member banks of the Federal Reserve system. The banks’ legal privilege is the ability to create money from nothing, or,

The permission to loan into existence, money representing wealth which has not yet been created. In doing so, they are effectively mortgaging the borrowers’ productivity, while risking nothing of their own.

The individuals lending on Prosper are not allowed, by any stretch of the imagination, to create pure debt obligations without forsaking anything of their own, they issue real loans, not fiat credit, which is backed by real assets accrued by previous productivity.

Gresham’s Law states that bad money drives out good money. Federal Reserve Notes are the bad money, and they are backed by the full force and violence of the government. Ultimately, the only thing that can destroy the banking cartel’s monetary monopoly is sound money.

Maybe this is a minor issue, but I think he’s overlooked the biggest part of the problem, and in doing so, he’s saying that the emperor’s clothes are out-of-style. I’m saying that the emperor has no clothes.

Kolb makes his end-goal pretty clear, saying that he wants to create “BitTorrent, for the people,” and that such a system needs to be “Off the radar, empowered to take the risk and the profit that they decide they should take.” If he is not already familiar with agorist/counter-economic philosophies, then it’s certainly something he should investigate. His goals, and the system he wants to assist in implementing, seem to be perfectly aligned with agorist ideas of economic independence, eliminating reliance on the monopoly of the State, and personal liberties..

I’m not trying to slam him for misunderstanding the nature of just how badly broken the system really is. Technical issues of economics aside, Kolb is right: people need to be free. People need to be free to lend to one another, borrow from one another, trade with one another. They need to be allowed to fulfill their own goals, without being robbed blind by a government, or a banking cartel, or both. People need to be free.

“The Dollar Standard Flooded the World With Funny Money”

November 25th, 2008

I’d argue that the world was already flooded with “funny money” by Nixon’s unilateral repudiation of the Bretton Woods agreement in 1971 (more on that, below) but even still, when the Financial Times is pimping a return to gold-backed money, what’s next, flying pigs?

When Richard Nixon destroyed the Bretton Woods International Monetary System in 1971 by closing the “gold window” at the Treasury, he severed the last link between dollars and gold. What followed was a spiralling proliferation of increasingly spurious credit instruments denominated in a debased currency.

I’m not sure the tie is completely “severed”, for instance, as long as the Government continues to run that printing press, the price of gold (in terms of dollars) should continue to rise.

It’s also important to remember that the monetary system installed under Bretton Woods agreement was already a severely debased version of a “gold standard”.

Most central banks had suspended convertibility during the first world war. The German hyperinflation of the interwar period was at least in part fueled by the crushing reparations due, and the onset of the second world war was more-or-less accurately forecast by J.M. Keynes in The Economic Consequences of the Peace.

The United States had begun to sever the de jure tie with gold as early as (if not earlier than) in 1913, but the most pernicious event occurred on April 5, 1933 when Franklin Delano Roosevelt ordered the expropriation of all privately owned gold money.

What followed was an explicit debasement of the dollar by at least 69%, raising the official price of gold from $20 to $35 per ounce. After Bretton Woods, Special Drawing Rights were required to convert currency into gold, and these SDRs generally reserved for international traders and government entities. As the dollar became the de facto reserve currency of the world, the United States found itself in the fortunate position of being able to export most of its inflation to the rest of the world.

Even Alan Greenspan once argued that “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.” So, if you want to talk inflation, (in terms of rising prices which reflect an artificially augmented money supply) just look at the chart to the left, showing the estimated Consumer Price Index from 1800 to 2007.  The advent of the Federal Reserve in 1913 is barely a blip on the radar when compared to 1971, but the former paved the way for the latter.

It’s not about some bizarre fetish for a “barbarous relic”, really, it’s not. It’s about plain-and-simple theft. It’s about rights. It’s about the wholesale expropriation of private property, by one of the greatest Moral Defectives ever to preside over the country.

How 80,000 Jobs Disappeared

November 24th, 2008

According to the Financial Times (all the news that’s fit to print), in the last week, the world’s economies lost 80,000 jobs. I have one question: How?

Seriously, how in the hell does something like this happen? The world did not stop turning.

These 80,000 people don’t want to be poor. They don’t want to be unemployed and unproductive. They didn’t choose to reduce their standards of living. They didn’t just decide that all of their needs, now and forever, have been met. No, all of these people still need food, shelter, warmth, leisure, whatever. Everyone still wants goods and services; everyone still wants stuff, and those needs can only be satisfied by production, which requires people.

As long as needs and wants remain unsatisfied, it doesn’t make sense that people are losing jobs left and right.

The idea that resources have been allocated towards the production of goods and services that aren’t really wanted, is the very essence of the Austrian take on business cycles. This is the crippling malinvestment that squanders capital, destroys wealth, and leaves people jobless. The joblessness is the very real personal side of malinvestment.

Not unless we assume that most of these people were simply not producing anything that anybody really wanted or needed, does it make sense. But it’s not their fault that they engaged in such unproductive activities, as individuals they were simply responding to incentives in the form of wages.

Following the paper trail, as it were, something had to make these wages possible, something had to tolerate or even encourage the misallocation of so many scarce resources, towards the production of things for which there was never any real demand. Something exogenous had to destroy all of our productivity.

We didn’t do it on our own.

That something is price inflation. And inflation is always caused by manipulation of the money supply by a central bank. Far from “stabilizing” the economy, or the money supply, by creating money from nothing they are capable of indebting everyone, controlling everyone.

Jobs, wealth, productivity, capital: all squandered, destroyed. And now they say, “The free market has failed you!” Now, they say, “You need Government more than ever before!”

The very people who claimed stewardship for your safety, your well-being, your economic prosperity are the ones responsible for so thoroughly eviscerating all those things. Those who created so much on paper, to expropriate the real, do you reward their deception? Do you reward their abysmal failures with more of your blood, sweat, tears?

Do you believe them when they say, “You need us, now more than ever”?

no third solution

Blogging about liberty, anarchy, economics and politics