no third solution

Blogging about liberty, anarchy, economics and politics

Fiat Credit is NOT a Loan

July 24th, 2008

A loan necessarily implies the temporary, conditional surrender of an asset (generally accumulated savings) to another person. There is always some risk that it will not be returned or that you will not be properly compensated per the agreement. But loans are granted on faith, and on the expectation that the lender will, in exchange for consumption in the present, be able to consume more in the future.

If your bartender or grocer extends some personal credit to you, since he doesn’t have any power to print money, he has effectively paid for your consumption out of his own pocket, on the assumption that you’ll pay him back in time. This sort of credit is non-inflationary because in a simple case (i.e., the grocer isn’t using a line of credit to purchase wholesale, etc.) it is fully collateralized. If you default, the lender loses out on whatever he lent you. The equations balance.

However, a credit card is not a loan. Sometimes they are characterized as unsecured loans, or unsecured lines of credit, but in truth they are not loans. When you buy a new plasma television on credit at Best Buy, nobody else in the world has loaned you his or her accumulated savings. Unbacked credit (i.e., unbacked by real assets) is purely a debt instrument, according to which the banker demands to be repaid (from your future productive capacity) for money that he literally created out of thin air.

Credit is merely the issue of new debt which must eventually be repaid. Credit of this nature (not to be confused with actual savings, loaned honestly) is nothing but debt, and it is a fraud. No one has surrendered an asset during the present, the use for which he anticipates a future income stream sufficient to satisfy his current and relative disutility. Because the interest charged on the debt is not contemporaneously created, debt can only ever be repaid with future indebtedness. If at any time the banker puts the kibosh on the issue of new debt, the existing debts become harder (or impossible) to repay, and the banks then begin the collections process which, when successful, results in the forfeiture of assets in lieu of satisfaction of the debt; those who control the issue of new debt profit immensely in a manufactured zero-sum game.

When a credit card company facilitates my purchase of a $1,000 television from Best Buy, what it has really done is created $1,000 worth of debt, out of thin air. I have a new television, Best Buy transfers what is essentially an account receivable from its own books to the credit card company, and the credit card company digitally bestows upon Best Buy $1,000 which quite literally never existed until the moment that I swiped my card at checkout. Best Buy then uses this $1,000 in fiat money which must be accepted for all debts public and private, to purchase more televisions, to pay its employees wages or shareholder dividends or income taxes….

Wage earners (most of us) are principally the last people to receive this newly created money, and they receive it only after enough time has passed and the primary and noticeable effects of inflation have rippled through the economy. If you wonder why prices rise, it’s because somewhere, someone else got access to a boat-load of newly minted greenbacks which nobody else knew existed (because in fact they did not exist) and used them to place competing bids on the purchases of real resources.

Non-institutional individuals are always the losers.

I say that those who control the issue of new debt profit immensely, because all wealth is embodied in real goods and services, not worthless paper and deposit slips. Through foreclosure proceedings, judgment liens, arbitration and repossession, the lenders seize title to real goods, for which they put up nothing in the first place, except the likelihood that they could perpetuate the swindle for another generation or two.

The present state of the market is such that nearly everyone accepts these credit transactions because they are denominated in the common medium of exchange and are backed by the full force of government fiat. People accept them, predominately because they have to accept them. Similarly, people are often reliant upon these instruments. Debt-based instruments like these cannot arise in a free market, since nobody will accept them in payment for real goods and services.

But without paper money, some argue, what would facilitate exchange? We can’t have a barter economy.

Of course, we can’t have a barter economy and we don’t need a barter economy. For millenia, the market has chosen above all other media of exchange, precious metals; and for good reasons. Precious metals do not decompose or otherwise lose value over any appreciable time period. Precious metals are nearly universally desired, thereby eliminating for all intents and purposes the “double-coincidence of wants” which plagues a barter economy.

It makes no differency why people have preferred metals, only that they continue to do so, and that this choice arises spontaneously, voluntarily, and without decree or violence.

Comments #18

June 21st, 2008

Gilligans Corner has an interesting post: Gresham’s Law Only Works Because of State Violence. I like to see other people who recognize this as fact. I’ve been working on some comprehensive post(s) on money and banking in a free market, and I find that a lot of really smart people think that Gresham’s Law holds absolutely. The fact of the matter is that when exchange rates or not manufactured or manipulated by government, Gresham’s Law doesn’t come in to play. Gresham’s Law only applies in situations where people are legally obliged to accept the “bad money” on par with the “good money.”

If “bad money” trades at a discount to “good money,” nobody has any incentive to spend only the former while hoarding only the latter.

+++

I love Decrease Your Demand For Oil (We Want It!), posted at RollingDoughnut.

If you’re meeting with representatives from another country for talks on “economic coordination”, it’s a bit embarrassing to be criticizing a country’s “economic coordination”. Central planning is as central planning does.

+++

I was going to write a piece about the supreme court decision earlier this month which affirmed the right of habeas corpus among the detainees at Gitmo. But time passes by so quickly, and others have done as good a job as I could have done (or better). So instead, read Mike’s snippet, as well as his commentary on the British equivalent of the MCA.

Kip offers insightful commentary, as usual:

Congress tried to pretend that it didn’t really suspend habeas corpus when it passed the Military Commissions Act and the Detainee Treatment Act. Today the Court made the uncontroversial observation that of course Congress suspended habeas corpus when it passed the MCA…

[T]he law’s most draconian provisions:

It immunizes government officials for past war crimes; it cuts the United States off from its obligations under the Geneva Conventions; and it all but eliminates access to civilian courts for non-citizens — including permanent residents whose children are citizens — that the government, in its nearly unreviewable discretion, determines to be unlawful enemy combatants.

+++

Orville Seymer left a comment on Why You Can’t Buy Allodial Title, he suggests a book by John Cobin, Ph.D. :

If anyone is interested in the concept of “Allodial Title” I would recommend a very good book titled. Building Regulation, Market Alternatives and Allodial Policy” it is written by John M. Cobin Ph.D.

I have read this book about 5 times and everytime that I look at it again, I find something new in there. Amazing!!!

I would also suggest that you check your state Constitution. For example, the Wisconsin Constitution, Article 1 Section 14 says very clearly that “All land within the state is declared to be allodial and feudal tenures are prohibited” Your state may have a similar clause. There are about a dozen states with that language in their Constitution.

I suppose it doesn’t come as a surprise that Cobin is a George Mason graduate. I found a link to purchase a PDF version of the book for $5.95.

Anyways, back to Seymer’s comments. I imagine that many states have a provision like that of Wisconsin, however I’ve heard of states (e.g., New York) which have rescinded that section in whole or in part, because they determined that Allodial title is an antiquated notion.

Any constitutional provision quickly becomes “antiquated” when the governnment unilaterally decides to stop respecting it. Allodial title is “antiquated” becaues the government stopped respecting it! According to the wikipedia entry on Allodial title,

[I]n the United States most lands are not allodial, as evidenced by the existence of property taxes

Fee simple is the highest form of ownership that any individual may generally attain in the United States. In the United States individuals cannot acquire Allodial title, because under what is essentially martial law, the Federal Government has declared itself owner of all lands, through the issuance of a Land Patent drafted and deemed sufficient by its own agents. The same Government which declares itself the rightful owner of all lands, is the arbiter who ultimately determines that you or I can’t own those lands.

I’ll have a more detailed post on the topic of Allodial title in the near future.

+++

In Reader Mail #56, FSK asks in regards to Comments #17:

David Z calculated that owning a car costs him $7k+ per year. Is he including just gas? Don’t forget depreciation of the car also! Also include the loss if you had invested that $7k elsewhere!

D’oh! I was including gasoline + insurance premiums + lease payment + regularly scheduled maintenance. I committed a serious error by overlooking opportunity cost, and to a lesser extent, depreciation, but since I lease the car, I’m not really worried about the latter. If the car depreciates more than anticipated, the dealer eats the loss. If it depreciates less, I can exercise my purchase option and trade it in for the higher value.

Right now, there is a lot of shake-up in the Auto industry because the sale prices of used trucks (especially trucks) is far lower than anyone anticipated, and this is making it harder to sell new trucks. I anticipated it, last summer in a discussion with a former Chrysler executive who shall remain nameless, I voiced the following concern:

Manufacturers have been flooding the market with deeply-discounted trucks, or promo-rates on leases with little or nothing down. When those leases all begin to expire at about the same time, there will be a glut of used trucks in relatively good condition on the market, this glut should tend to force prices downward.

Said Chrysler exec dismissed my objection as folly. This is exactly what’s happening right now. What the hell did I know? I was a 26-year old attending the new-employee orientation program; I wasn’t trying to show him up, but I get the feeling that he took my question personally.

+++

I received a handful of comments on Trial by Jury. My previous posts on jury nullification have been popular.

Kip says, responding more to Lysander Spooner (or my endorsement thereof) than to me, directly:

Well, I enjoy a flamboyant line as much as the next writer, but I can quite frankly think of several “clearer principles of English or American constitutional law” than jury nullification.

And if one is going to go back to 1215, then let’s, um, go back to 1215: Laws from unelected monarchs, no lifetime-appointment of judges, no right to free counsel, no concept of judicial review, no appellate court structure to speak of, etc.

Times change.

To a point, I agree. Spooner’s argument is well-thought and appears well-researched. It is not necessarily a clear principle, although as Spooner demonstrates, can be derived from man’s natural rights, which are unaffected by the changing times.

The principle is not necessarily “jury nullification,” but rather the idea that individual jurors have the moral right to determine not only the facts of the case, but also the propriety (or impropriety) of the law. Spooner’s thesis is pretty strong: the idea of jury trials goes back to the “laws from unelected monarchs” against which the Magna Carta was implemented.

Perhaps we should review Spooner’s argument:

Many of these bills of rights also assert the natural right of all men to protect their property — that is, to protect it against the government. It would be unnecessary and silly indeed to assert, in a constitution of government, the natural right of individuals to protect their property against thieves and robbers.

The idea of a jury trial as set forth in the Magna Carta, one would assume, rests on a jury of peers and not a jury of the king’s men, since the latter having been the status quo, would’ve been a pointless addendum. It’s unlikely that those trying to factually depose an unelected monarch would’ve allowed him to retain his judge & jury robes.

On this note, Franc comments:

I am reading a book about the English justice system. Interestingly, juries were first started by the English kings, and they were mostly composed of the king’s men. People were so scared of juries that they would rather die than go on a trial with jury (if they died, their estate would go to their family: if they were executed, as juries always found you guilty, your estate would go to the king).

Mike says that the idea behind jury nullification is to

prevent the government’s constituting a jury of its own partisans or friends; in other words, to prevent the government’s packing a jury, with a view to maintain its own laws, and accomplish its own purposes.

Spooner, astonishingly enough, agrees:

…If the government may decide who may, and who may not, be jurors, it will of course select only its partisans, and those friendly to its measures. It may not only prescribe who may, and who may not, be eligible to be drawn as jurors; but it may also question each person drawn as a juror, as to his sentiments in regard to the particular law involved in each trial, before suffering him to be sworn on the panel; and exclude him if he be found unfavorable to the maintenance of such a law.

This brings us full circle to the Magna Carta.

Really the idea behind jury nullification is that the whole jury will return a “not guilty” verdict. This is a daunting task, primarily because most people are idiots, and they are at least initially and outwardly, perfectly willing to apply an unjust law, despite the fact that this may eventually be the cause of some emotional distress. People return verdicts because they want to get the hell out of the courtroom, and back to their normal routines, or because they don’t want to keep 11 other people away from their normal routines. In doing so, they cut corners, they rationalize the arguments pro or con, in short, the verdicts are returned based not entirely on the facts of the case. People do a great many things which they would not otherwise do, when the State is pointing a gun at them.

As a principle, jury nullification per Spooner (and to a lesser extent, Balko) depends on a panel of learned jurors willing to defy an unjust law in a corrupt system. Returning a null verdict is a daunting task, because it requires that at least one juror have the intellectual and moral fortitude to sway the rest of the jurors. In practice, the result of an attempt to nullify is usually a single juror who won’t partake in a mockery of justice, and the net result is that the accused winds up going before another jury, none of whom are willing to defy the system.

I read most of Spooner’s Trial by Jury in the last few days, there is a lot of material there to mull over, and I anticipate another full-length post on the topic some time in the future.

+++

Comments on Comments #12

April 4th, 2008

Tony comments on “How Much is a Kitchen Worth?“. He astutely notes some of the risks involved in renovating, and says that he expects some return for the installation of hardwood floors,

[P]rimarily through the effort involved in installing and the disruption during the process. (The latter is huge.)

It’s also important to remember that these TV programs generally foot the bill for all the labor which is a substantial component of the price of renovations, and they do it quickly. These factors minimize the material and non-material costs of renovation, and bundle them up with the awe-factor of being on a nationally televised program. As Tony indicates, for many people contemplating a renovation, the non-monetary costs involved are often substantial.

I think the bottom line is that some non-zero return should be expected for most renovations, provided they more closely align the property with its comps. But I think the pie-in-the-sky returns mentioned on these TV shows are a thing of the past.

+++

One of my posts, War Tax Resistance and Agorism, drew some criticism from The Picket Line, a tax-resistance advocate. Picket Line concludes:

I think we probably agree more than we disagree when it comes right down to it, but I’m too impatient to wait for the perfect solution. I’m eager to start right now with less-perfect but still practical solutions, hoping that although “there simply aren’t enough” of us to defund the government right now, thanks to me there’s one more than there used to be, and in order for that “enough” to ever come about, people like me will have to decide, one-by-one, to be the next not-yet-enough one.

My sentiments are that tax-withholding is not an imperfect solution, it’s not a solution! But before I’m accused of being combative and argumentative (I probably am!) I agree with the spirit of tax resistance, I also agree that success needs to be built one man at a time (hopefully at some point it goes viral). But I still maintain that the direction of change is agorism. (I do not yet have a solution for practical agorism.)

If you’re resisting taxes that are used to pay for war, why aren’t you resisting taxes that are used to pay for all the other evils perpetrated by the State? It’s like saying, “Well, if only the State weren’t engaged in these empire-building wars of aggression abroad I wouldn’t have a problem paying my taxes.”

The taxation is evil, in itself. It’s not evil because of the ends towards which those funds are applied.

+++

In response to “What is Your Obligation to Your Lender?“, Logan has responded:

I encourage you to re-read my original post without emotion.

Pot, meet Kettle. Kettle, Pot. :)

I clearly was not talking about people who can no longer afford their mortgage payments; I was talking about people who can afford their mortgage payments but because they are in a negative equity situation freely choose to abandon their promise to a lender (not necessarily a bank, by the way) and borrow again to buy another property and simply walk away from the first property.

Logan has juxtaposed the property leapers into the argument, and therein lies the problem: the focus of my posts has been primarily on “people who cannot afford their payments,” not on property leapers. Specifically, I said “Let me make one thing abundantly clear: I’m not talking about people who are trying to dump a property that they can easily afford, just because they’re upside-down.” I don’t know why Logan decided to flip the script on me and start talking about something else. Hilarity did not ensue!

I’m not aware of a property-leaping epidemic but I’m sure there have been a few attempts here and there. In any event, it would be prohibitively difficult for all but the most qualified buyers to do something like this, profitably. And it probably wouldn’t be worth it in the long-term. I believe I called this “financial suicide.”

I am not a “bank-apologist” or “state-apologist”, but I am a lender myself. Lending and borrowing are a natural part of capitalism, if not a defining part of capitalism. A lender uses money (the principal) to make more money (the interest and fees). Similarly, an investor uses money (the investment) to make more money (the dividends/royalties/rental fees, etc.). There is nothing inherently evil in these two types of capitalist activity; but, there can be evil in how human beings and organizations of human beings behave in such capitalist activity. And such evil can show up on both sides of the transaction. All I was trying to point out in my original post was that evil does lurk in the hearts of borrowers as well. The property leaping by a healthy borrower done to avoid TEMPORARY negative equity is a great example.

It’s a “great example” insofar as red herrings are concerned. But it’s not what I was talking about, except for perhaps insinuating that I have no soft spot in my heart for the banks which have been bending people over for years; something about 1913 rings a bell…

Logan, I’m well-versed in the intricacies of capitalism. Before I considered myself an anarchist, I was an anarcho-capitalist, following the vulgar libertarian path back to Rand. I’ll be one of the last people to tell you that lending and borrowing money is wrong and I will never advocate usury laws. But I’ll be among the first to tell you that the current system of fractional reserve banking is nothing short of fraudulent. There may be some bad apples among the borrowers, but they are dwarfed in number by the bad apples among the lenders, who are of the Barry-Bonds-didn’t-know-he-was-on-‘roids variety.

Allow me to explain: Barry says that he never knew he was juicing. This is bullshit for a number of reasons, but principally because only an idiot so dependent on his body and health for his livelihood would put unknown substances into his body. If he didn’t know, it’s because he didn’t want to know. And if he didn’t want to know, it’s because he already knew!

If bankers didn’t know that what they were doing was wrong, it’s because they didn’t want to know. And if they didn’t want to know, it’s because they already knew, or should have known. Another way of looking at it is like this: If they didn’t know they were taking on piles of bad debt, it’s because they didn’t want to know. And if they didn’t want to know, it’s because they already knew!

But it’s not wrong because the government permits or encourages it, right? Wrong! The sanction of a government lends no legitimacy to an illegitimate act! It doesn’t require to strenuous an application of reason to conclude that loaning money into existence, out of thin air, and then asking to be repaid plus interest is in many regards a worse deed than simple counterfeit or theft.

Logan wholeheartedly ignores this charge (for at least the second time) that bankers are profiting from pure monetary inflation/debasement. Moreover, he has neglected to address my response to his own position on “The Golden Rule,” which seemed to be of paramount importance in his last comment, apparently it applies to borrowers, but not lenders.

At this point, I am not interested in any further commentary which does not contribute substantively to the discussion, as it pertains to the nature and morality of the banking system and/or the source from whence it derives profits.

+++

Franc responds to a common criticism of anarchists: our ideals are utopian, and hence impossible.

If Anarchy cannot “work,” then government itself, which must obviously have been created from a state of Anarchy, also cannot “work.” How can an unworkable system produce a workable system? The reverse can happen, of course. A skilled carpenter can create a botched piece, but an unskilled carpenter cannot create a masterpiece. If the initial Anarchist state of affairs was “unworkable,” then where was the potential in this “unworkable” society to create the “order” of government?

So, statism is also utopian in nature, and any criticism on that ground is inherently contradictory.

+++

Coyote wants to know if anyone can solve problems without government anymore. I just read about how the public utilities in Michigan have spent record-breaking amounts of money lobbying in Lansing to secure price increases and thwart competition. Charming. One point that Coyote makes with which I disagree (and I rarely disagree with him, so this might be semantics) is the idea that it would be appropriate for private citizens to buy a bunch of land, and then donate it to the federal government to preserve the parks.

Here is an idea: All you folks who are worried about these “treasures” can pool your money and buy the properties yourselves. That way you can either take charge of the preservations or donate the land to the government to do so. This is how many public parks came into being in the first place, from private donations.

I prefer his first proposal. Take charge of the preservations privately. If the land is given to the government, we can expect market distortions and there is no good reason to believe that it will be managed or preserved adequately. Furthermore, once the park becomes “public” in nature, the burden of its upkeep is spread among all taxpayers. I would rather have the land donated to government, than have government simply take it, but what I really want is for fictional entities to stop “owning” land, and making everyone else pay for it.

+++

At The Distributed Republic, Mark lists a number of ways to replace the safety nets and programs currently provided by the government, and concludes by asking:

With the exception of blatantly coercive acts–waging offensive wars, intimidating other states or individuals, confiscating property–is there a single function of the federal government that couldn’t be replaced? If not, why wait?

Mark! I’m not waiting, but the government is. The simple, short answer is that the government won’t voluntarily disband. It will either be overthrown (violently, or otherwise) and be replaced by another government, or it will crumble under its own weight, presenting the opportunity for the markets to fill the void.

+++

Enjoy the weekend.