Author Archive for Family Wealth Wisdom – Page 2

Explaining Central Banks’ Gold Purchases

By David Howden
From Mises Daily

The last two years marked a significant shift in central banks’ attitudes toward gold. Since 1988, central banks have been net sellers of the precious metal. Lacking convertibility of their paper currencies into the commodity, this occurrence makes perfect sense. Why hold a physical asset with costly storage fees when there is no risk that it will ever be needed? Better to hold an interest-bearing (and easily stored) asset like a government security to earn a profit in the interim. So goes the typical explanation for why central banks load their balance sheets with financial assets instead of physical ones.

Yet over the last two years a dramatic shift in gold purchases has occurred. In the third quarter of this year alone, net gold purchases by central banks amounted to 150 tons — more than double the amount of the whole yearly total of 2010. For the first time in over 20 years, central banks of the world are buying more gold than they are divesting themselves of.

Yet if central banks deal exclusively in nonconvertible (and fiat) money, what explains the sudden change of heart?

Convertibility may bring costs for a central bank, but it also has its benefits. In particular, it solved two problems:

  1. How would central banks maintain independence from their governments?
  2. How much money should they supply?

Without convertibility, these two issues get significantly more complicated. In this short essay, we will focus on only the first of these problems.

Independence for a central bank comes from the government that grants it the monopoly rights to money production in its jurisdiction. Congress provides oversight for the Fed, but no government agent specifically determines the day-to-day operations of the central bank. (This is debatable, of course, but that is a separate issue.)

This independence is coveted, and for good reason. A government in charge of its printing press has an incentive to pay for its expenditures not through taxes, or even by debt, but through the relatively painless act of printing the necessary money. The problem with this is the ensuing inflationary bias that a government-controlled printing press has.

An independent central bank issues currency, which is recorded as a liability on its balance sheet. In an offsetting transaction, an asset is purchased that balances the accounting statement. Though this asset can be anything, it has become the norm that it is a relatively safe interest-bearing government bond. Gold still comprises a portion of most central banks’ balance sheets, but because it has its own costs and returns no interest, it is a relatively unattractive option.

If a central bank wants to directly increase the money supply, it increases its liabilities (sells cash) and correspondingly increases its assets (buys bonds). If it wants to decrease the money supply, it decreases its assets (sells bonds), which then decreases its liabilities (by decreasing the amount of cash outstanding).

As a thought experiment, imagine what would happen if a central bank didn’t sell any assets but instead had them lose value. As an extreme example, imagine that the bonds it holds default due to the insolvency of their issuer. Cash does not automatically have to adjust by decreasing by an equivalent amount. To maintain the accounting equality, the relevant liability that changes is the central bank’s equity. Accounting insolvency is defined as being that moment when your equity turns negative.

It is difficult to imagine a central bank turning insolvent. Indeed, by and large this doesn’t happen, though as Philipp Bagus and I outline in our book, Deep Freeze: Iceland’s Economic Collapse, recent examples do exist (see also here). A central bank that holds bonds as its assets only maintains its solvency as long as the issuer of its bonds maintains its own solvency.

The problem that develops is what to do if equity turns negative. Recapitalization must result, but by whom? In an extreme scenario, the government can directly recapitalize the central bank. This action is not without consequences. Central banks enjoy, at least in some countries, high degrees of independence because they do not rely on their governments for funding. Indeed, as they remit profits back to the government at year’s end, they are revenue generators for the government.

But a government supporting a central bank is also increasingly interested in how that bank is run. Increased oversight of the monetary authority might be welcomed by some, but it also opens Pandora’s box: perhaps with the increased oversight the government will also start influencing the central bank’s operating mandates, or even its daily operations.

Gold purchases by central banks are completely rational responses given this independence dilemma. With the solvency of some large governments being increasingly questioned each day, investors and central banks alike are also questioning the value of their debts. Greece just gave private holders of its debt a 50 percent haircut; could the same for governments and other organizations be far off? The solvency of a growing list of countries gets longer by the week — Ireland, Portugal, Italy, Spain — not even the United States is immune to this possibility, as its own debt crisis illustrates.

Holding gold does not eliminate the possibility of negative equity for the central bank (indeed, it might even increase the odds). But given the recent past it makes for an attractive option. As countries demonstrate their difficulties in getting their debts and deficits in order and thus improving their solvency outlooks, the value of their debt becomes questionable as well.

While holding any real asset serves no direct use for a central bank, it does act as an insurance policy of sorts. The solvency of a central bank holding government debt is subordinate to the solvency of the countries whose debt it holds. For a central bank worried about the value of its assets, diversification of its assets into gold makes for a rational alternative.

 

David Howden is chair of the department of business and social sciences, and associate professor of economics at St. Louis University, at its Madrid Campus, and winner of the Mises Institute’s Douglas E. French Prize.

Europeans And Their Tax Rates

By R. Nelson Nash

If you’ve started to wonder what the real costs of socialism are going to be once the full program in these United States hits your wallet, take a look at the table (see below).

Current European Tax Rates

Country
Income Tax
VAT
Total
United Kingdom
50%
17.5%
67.5%
France
40%
19.6%
59.6%
Greece
40%
25%
65%
Spain
45%
16%
61%
Portugal
42%
20%
62%
Sweden
55%
25%
80%
Norway
54.3%
25%
79.3%
Netherlands
52%
19%
71%
Denmark
58%
25%
83%
Finland
53%
22%
75%

As you digest these mind-boggling figures, keep in mind that in spite of these astronomical tax rates, these countries are still not financing their social welfare programs exclusively from tax revenues! They are deeply mired in public debt of gargantuan proportions. Greece has reached the point where  its debt is so huge it is in imminent danger of defaulting. That is the reason the European economic community has intervened to bail them out. If you’re following the financial news, you know Spain and Portugal are right behind Greece.

The United States is now heading right down the same path. The VAT tax in the table is the  national sales tax that Europeans pay. Stay tuned because that is exactly what you can expect to see the administration proposing after the fall elections. The initial percentage in the United States isn’t going to be anywhere near the outrageous numbers you now see in Europe. Guess what. The current outrageous numbers in Europe didn’t start out as outrageous either. They started out as minuscule, right around the 1% or 2% where they will start out in the United States. Magically, however, they ran up over the years to  where they are now. Expect the same thing here.

It is the very notion that with hard work and perseverance, anybody can get ahead economically here in the USA. Do you think that can ever happen with tax rates between 60% and 80%? Think again. With the government taking that percentage of  your money, your life will be exactly like life in Europe. . . You will never be able to buy a home. You will never buy a car. You will never send your children to college. Let’s not shuffle the battle cry of the  socialists under the rug either. It’s always the same cry. Equalize income. Spread the wealth to the poor (whoever they are). Level the economic playing field.  Accomplish that and everything will be rosy.

It’s time to take a really hard look at reality. Greece is a perfect example. Despite the socialism system that has ruled this country for decades, with a  65% tax rate, they are drowning in public debt, would have defaulted without hundreds of billions in bailout money from the  EU, and still… 20% of their population lives in poverty. What has all that socialism money bought, besides ultimate power for the politicians running the show? Do you think these people are “free?”  They’re not. They are slaves to their economic “system.”

Why the State Demands Control of Money

By Hans-Hermann Hoppe
[Originally published in Mises Daily, October 13, 2011]
www.mises.org

Imagine you are in command of the state, defined as an institution that possesses a territorial monopoly of ultimate decision making in every case of conflict, including conflicts involving the state and its agents itself, and, by implication, the right to tax, i.e., to unilaterally determine the price that your subjects must pay you to perform the task of ultimate decision making.

To act under these constraints — or rather, lack of constraints — is what constitutes politics and political action, and it should be clear from the outset that politics, then, by its very nature, always means mischief. Not from your point of view, of course, but mischief from the point of view of those subject to your rule as ultimate judge. Predictably, you will use your position to enrich yourself at other people’s expense.

More specifically, we can predict in particular what your attitude and policy vis-à-vis money and banking will be.

Assume that you rule over a territory that has developed beyond the stage of a primitive barter economy and where a common medium of exchange, i.e., a money, is in use. First off, it is easy to see why you would be particularly interested in money and monetary affairs. As state ruler, you can in principle confiscate whatever you want and provide yourself with an unearned income. But rather than confiscating various producer or consumer goods, you will naturally prefer to confiscate money. Because money, as the most easily and widely saleable and acceptable good of all, allows you the greatest freedom to spend your income as you like, on the greatest variety of goods. First and foremost, then, the taxes you impose on society will be money taxes, whether on property or income. You will want to maximize your money-tax revenues.

In this attempt, however, you will quickly encounter some rather intractable difficulties. Eventually, your attempts to further increase your tax income will encounter resistance in that higher tax rates will not lead to higher but to lower tax revenue. Your income — your spending money — declines, because producers, burdened with increasingly higher tax rates, simply produce less.

In this situation, you only have one other option to further increase or at least maintain your current level of spending: by borrowing such funds. And for that you must go to banks — and hence your special interest also in banks and the banking industry. If you borrow money from banks, these banks will automatically take an active interest in your future well-being. They will want you to stay in business, i.e., they want the state to go on in its exploitation business. And since banks tend to be major players in society, such support is certainly beneficial to you. On the other hand, as a negative, if you borrow money from banks you are not only expected to pay your loan back, but to pay interest on top.

The question, then, that arises for you as the ruler is, How can I free myself of these two constraints, i.e., of tax-resistance in the form of falling tax revenue and of the need to borrow from and pay interest to banks?

It is not too difficult to see what the ultimate solution to your problem is.

You can reach the desired independence of taxpayers and tax payments and of banks, if only you establish yourself first as a territorial monopolist of the production of money. On your territory, only you are permitted to produce money. But that is not sufficient. Because as long as money is a regular good that must be expensively produced, there is nothing in it for you except expenses. More importantly, then, you must use your monopoly position in order to lower the production cost and the quality of money as close as possible to zero. Instead of costly quality money such as gold or silver, you must see to it that worthless pieces of paper that can be produced at practically zero cost will become money. (Normally, no one would accept worthless pieces of paper as payment for anything. Pieces of paper are acceptable as payment only insofar as they are titles to something else, i.e., property titles. In other words then, you must replace pieces of paper that were titles to money with pieces of paper that are titles to nothing.)

Under competitive conditions, i.e., if everyone were free to produce money, a money that can be produced at almost zero cost would be produced up to a quantity where marginal revenue equals marginal cost, and because marginal cost is zero the marginal revenue, i.e., the purchasing power of this money, would be zero as well. Hence, the necessity to monopolize the production of paper money, so as to restrict its supply, in order to avoid hyperinflationary conditions and the disappearance of money from the market altogether (and a flight into “real values”) — and the more so the cheaper the money commodity.

In a way, you have thus accomplished what all alchemists and their sponsors wanted to achieve: you have produced something valuable (money with purchasing power) out of something practically worthless. What an achievement. It costs you practically nothing and you can turn around and buy yourself something really valuable, such as a house or a Mercedes; and you can achieve these wonders not just for yourself but also for your friends and acquaintances, of which you discover that you have all of a sudden far more than you used to have (including many economists, who explain why your monopoly is really good for everyone).

What are the effects? First and foremost, more paper money does not in the slightest affect the quantity or quality of all other, nonmonetary goods. There exist just as many other goods around as before. This immediately refutes the notion — apparently held by most if not all mainstream economists — that “more” money can somehow increase “social wealth.” To believe this, as everyone proposing a so-called easy-money policy as an efficient and “socially responsible” way out of economic troubles apparently does, is to believe in magic: that stones — or rather paper — can be turned into bread.

Rather, what the additional money you printed will affect is twofold. On the one hand, money prices will be higher than they would otherwise be, and the purchasing power per unit of money will be lower. In a word, the result will be inflation. More importantly, however, all the while the greater amount of money does not increase (or decrease) the total amount of presently existing social wealth (the total quantity of all goods in society), it redistributes the existing wealth in favor of you and your friends and acquaintances, i.e., those who get your money first. You and your friends are relatively enriched (own a larger part of the total social wealth) at the expense of impoverishing others (who as a result own less).

The problem, for you and your friends, with this institutional setup is not that it doesn’t work. It works perfectly, always to your own (and your friends’) advantage and always at the expense of others. All you have to do is to avoid hyperinflation. For in that case people would avoid using money and flee into real values, thus robbing you of your magic wand. The problem with your paper-money monopoly, if there is one at all, is only that this fact will be immediately noticed also by others and recognized as the big, criminal rip-off that it indeed is.

But this problem can be overcome, too, if, in addition to monopolizing the production of money, you also set yourself up as a banker and enter the banking business with the establishment of a central bank.

Because you can create paper money out of thin air, you can also create credit out of thin air. In fact, because you can create credit out of nothing (without any savings on your part), you can offer loans at cheaper rates than anyone else, even at an interest rate as low as zero (or even at a negative rate). With this ability, not only is your former dependency on banks and the banking industry eliminated; you can, moreover, make banks dependent on you, and you can forge a permanent alliance and complicity between banks and state. You don’t even have to become involved in the business of investing the credit yourself. That task, and the risk involved in it, you can safely leave to commercial banks. What you, your central bank, need to do is only this: You create credit out of thin air and then loan this money, at below-market interest rates, to commercial banks. Instead of you paying interest to banks, banks now pay interest to you. And the banks in turn loan out your newly created easy credit to their business friends at somewhat higher but still submarket interest rates (to earn from the interest differential). In addition, to make the banks especially keen on working with you, you may permit the banks to create a certain amount of their own new credit (of checkbook money) in addition and on top of the credit that you have created (fractional-reserve banking).

What are the consequences of this monetary policy? To a large extent they are the same as with an easy money policy: First, an easy credit policy is also inflationary. More money is brought into circulation and prices will be higher, and the purchasing power of money lower, than would have been the case otherwise. Second, the credit expansion too has no effect on the quantity or quality of all goods currently in existence. It neither increases nor decreases their amount. More money is just this: more paper. It does not and cannot increase social wealth by one iota. Third, easy credit also engenders a systematic redistribution of social wealth in favor of you, the central bank, and the commercial banks within your cartel. You receive an interest return on money that you have created at practically zero cost out of thin air (instead of on money costly saved out of an existing income), and so do the banks, who earn additional interest on your costless money loans. Both you and your banker friends thereby appropriate an “unearned income.” You and the banks are enriched at the expense of all “real” money savers (who receive a lower interest return than they otherwise would, i.e., without the injection of your and the banks’ cheap credit into the credit market).

On the other hand, there also exists a fundamental difference between an easy, print-and-spend money policy and an easy, print-and-loan credit policy.

First off, an easy credit policy alters the production structure — what is produced and by whom — in a highly significant way.

You, the chief of the central bank, can create credit out of thin air. You do not have to first save money out of your money income, i.e., cut your own expenses, and thus abstain from buying certain nonmoney goods (as every normal person must, if he extends credit to someone). You only have to turn on the printing press and can thus undercut any interest rate demanded of borrowers by savers elsewhere in the market. Granting credit does not involve any sacrifice on your part (which is why this institution is so “nice”). If things then go well, you will be paid a positive-interest return on your paper investment, and if they don’t go well — well, as the monopoly producer of money, you can always make up losses more easily than anyone else: by covering your losses with even more printed paper.

Without costs and no genuine, personal risk of losses, then, you can grant credit essentially indiscriminately, to everyone and for any purpose, without concern for the creditworthiness of the debtor or the soundness of his business plan. Because of your “easy” credit, certain people (in particular investment bankers) who otherwise would not be deemed sufficiently creditworthy, and certain projects (in particular of banks and their main clients) that would not be considered profitable but wasteful or too risky instead do get credit and do get funded.

Essentially, the same applies to the commercial banks within your banking cartel. Because of their special relationship to you, as the first recipients of your costless low-interest paper-money credit, the banks, too, can offer loans to prospective lenders at interest rates below market interest rates — and if things go well for them they go well; and if they don’t, they can rely on you, as the monopolistic producer of money, to bail them out in the same way as you bail yourself out of any financial trouble: by more paper money. Accordingly, the banks too will be less discriminating in the selection of their clients and their business plans and more prone to funding the “wrong” people and the “wrong” projects.

And there is a second significant difference between a print-and-spend and a print-and-loan policy and this difference explains why the income and wealth redistribution in your and your banker friends’ favor that is set in motion by easy credit takes the specific form of a temporal — boom-bust — cycle, i.e., of an initial phase of seeming general prosperity (of expected increases in future incomes and wealth) followed by a phase of widespread impoverishment (when the prosperity of the boom period is revealed as a widespread illusion).

This boom-bust feature is the logical — and physically necessary — consequence of credit created out of thin air, of credit unbacked by savings, of fiduciary credit (or however else you may call it) and of the fact that every investment takes time and only shows later on, at some time in the future, whether it is successful or not.

The reason for the business cycle is as elementary as it is fundamental. Robinson Crusoe can give a loan of fish (which he has not consumed) to Friday. Friday can convert these savings into a fishing net (he can eat the fish while constructing the net), and with the help of the net, then, Friday, in principle, is capable of repaying his loan to Robinson, plus interest, and still earn a profit of additional fish for himself. But this is physically impossible if Robinson’s loan is only a paper note, denominated in fish, but unbacked by real-fish savings, i.e., if Robinson has no fish because he has consumed them all.

Then, and necessarily so, Friday must fail in his investment endeavor. In a simple barter economy, of course, this becomes immediately apparent. Friday will not accept Robinson’s paper credit in the first place (but only real, commodity credit), and because of this, the boom-bust cycle will not get started. But in a complex monetary economy, the fact that credit was created out of thin air is not noticeable: every credit note looks like any other, and because of this the notes are accepted by the takers of credit.

This does not change the fundamental fact of reality that nothing can be produced out of nothing and that investment projects undertaken without any real funding whatsoever (by savings) must fail, but it explains why a boom — an increased level of investment accompanied by the expectation of higher future income and wealth — can get started (Friday does accept the note instead of immediately refusing it). And it explains why it then takes a while until the physical reality reasserts itself and reveals such expectations as illusory.

But what’s a little crisis to you? Even if your path to riches is through repeated crises, brought about by your paper-money regime and central-bank policies, from your point of view — from the viewpoint as the head of state and chief of the central bank — this form of print-and-loan wealth redistribution in your own and your banker friends’ favor, while less immediate than that achieved with a simple print-and-spend policy, is still much preferable, because it is far more difficult to see through and recognize for what it is. Rather than coming across as a plain fraud and parasite, in pursuing an easy-credit policy you can even pretend that you are engaged in the selfless task of “investing in the future” (rather than spending on present frivolities) and “healing” economic crises (rather than causing them).

What a world we live in!

How to Fix the Housing Crisis

By Doug French
[Originally published in Mises Daily, November 4, 2011]
www.mises.org

The foreclosure crisis has crawled on for going on four years now with no end in sight. The S&P/Case-Shiller index for August fell 3.8 percent from a year ago. The index includes home prices for 20 US cities.

“Continued house price declines could lead to even more defaults, foreclosures and distress sales, undermining wealth, confidence and spending,” William Dudley, president of the Federal Reserve Bank of New York said. “Breaking this vicious cycle is one of the most pressing issues facing policy makers.”

Every one of the Republican presidential candidates is being asked how they would handle the slow-motion housing wreck. Long shot Newt Gingrich says he would rewrite the rules to make it profitable for banks to renegotiate loan principal amounts.

“He disagrees with his Republican colleagues that the free market will find a fair way to let the banks and homeowners work things out,” writes Karoun Demirjian for the Las Vegas Sun.

President Obama has jumped in to adjust Fannie Mae and Freddie Mac rules to allow refinances for loans exceeding 125 percent loan to value.

The president says this will save underwater homeowners thousands of dollars a year.

Princeton professor Alan Blinder penned an op-ed for the Wall Street Journal proposing forced principal reductions with the cost to be shared by banks and taxpayers — with the proviso that government be given an equity kicker when housing prices go back up.

Blinder also thinks the Federal Reserve and Treasury should provide cheap financing to developers who will use the money to buy up properties with the intention of renting the properties out.

Harvard’s Martin Feldstein put in his two cents’ worth on the issue for the New York Times. Feldstein points out that home values have dropped 40 percent. The result, he writes, is “less consumer spending, leading to less business production and fewer jobs.”

Feldstein claims the government can stop the fall in house prices by slicing off any mortgage principal amount owed exceeding 110 percent loan to value. He says this policy would cost $350 billion or less and would modify 11 million of the 15 million “underwater” homes in America. The banks and the government would split the cost, and in the case of mortgages held by Fannie and Freddie, “the government would just be paying itself,” he writes, presumably with a straight face.

In exchange for having their lender take a haircut over 110 percent, borrowers would accept full recourse on the modified loan.

“I cannot agree with those who say we should just let house prices continue to fall until they stop by themselves,” writes Feldstein. “Although some forest fires are allowed to burn out naturally, no one lets those fires continue to burn when they threaten residential neighborhoods.”

“Recovering the 31 percent plunge in home prices from their 2006 peak will probably be years in the making as foreclosures throw more properties on the market and sales flag,” writes Shobhana Chandra for Bloomberg.

Despite the obvious, policymakers and wonks think trimming mortgage principal down to just 10 percent underwater or that lowering borrowers’ financing costs for those 25 percent (or more) underwater will somehow halt the slide in home values and spur consumer spending.

The belief is that if homeowners are just kinda, sorta underwater then they will keep on faithfully paying Fannie, Freddie, BoA, Wells, Morgan, and the rest. Never mind that it will still take years of steady payments to ever see the faintest ray of equity light shine through the crack between what’s owed and the home’s value.

We can see how this works out for a hypothetical couple created by Brent T. White in his Arizona Legal Studies discussion paper. The young couple buys a 1,380-square-foot home in Salinas, California, for $585,000 in January 2006. The couple purchased the home with no money down with a 30-year, fully amortizing loan at 6.5 percent interest. The payment including insurance and taxes is $4,300 a month.

Now the home is only worth $187,000. An Obama refinance of the $560,000 that they still owe on the note will lower their payment by $900. But the couple will never really own any of the home.

Under the Martin Feldstein plan, the note holder and taxpayers would eat $354,300, leaving the young couple with a mortgage of $205,700. Given the ultralow current mortgage rates of 4.5 percent, a 30-year fully amortizing deal including taxes and insurance would be a payment in the neighborhood of $1,250.

If we closed the deal this month, assuming home prices don’t fall any further in Salinas, our young couple will see some equity in December 2016.

Meanwhile the same home can be rented for $1,000 a month. Instead of paying $1,250 a month to have equity of $168 in 61 months, saving the extra $250 a month and earning no interest on it equals $15,250 in the same amount of time.

Of course home prices in central California might rise 2 percent a year, so after five years the home would be worth $206,500, but then half of any equity belongs to Uncle Sam under the Blinder plan.

All of these ideas to save the housing market and supposedly to increase consumer spending do exactly the opposite. These plans keep people chained to underwater mortgages, keeping them from moving to where there are more and better job opportunities.

Unemployed heavy-equipment operator Charles Mills wanted to leave North Las Vegas for Oklahoma and a job, but he is $200,000 underwater on a home he bought at the peak of the housing market in 2006. The plans mentioned by Blinder and Feldstein would relieve Mills of roughly $190,000 of the debt, but the principal reduction won’t put him back to work. Plus, the odds of a quick turnaround in North Las Vegas home values are about the same as for the Kansas City Royals to win the 2012 World Series.

The idea that the too-big-to-fail banks will cover half the cost of these plans is laughable. The hit to their capital would be considerable, sending the banks right back to Washington’s door with a tin cup.

And how much bureaucracy would be required to manage the implementation of these plans and determination of equity splits when homes are sold?

All of these plans are not really aid to underwater homeowners as much as another bailout for the banks — not to mention Fannie and Freddie.

Any business dominated by entities only in business because of the good graces of the government cannot be considered part of the free market. The reason the housing market is not clearing is that the government stands in the way by propping up the large mortgage holders.

No reasonable person sees Fannie Mae and sister entity Freddie Mac, which were seized by the government in September 2008, as the product of spontaneous order. To stay in business, the two firms together have needed about $169 billion in taxpayer bailout funds, with no end in sight.

Changes to FASB rules 157, 115, and 124, which allowed banks greater discretion in determining at what price to carry certain types of securities on their balance sheets and recognition of other-than-temporary impairments have made the big banks wards of the state as well.

The real help for underwater homeowners will only arrive when Fannie, Freddie, and the rest are allowed to fail. The equivalent of a chapter 7 bankruptcy filing (liquidation) would put these underwater loans out for bid in the market place. Would our mythical mortgage in Salinas, secured by a house worth $187,000, trade for $205,700? Not hardly.

No one can get a loan for a 110 percent of value in this market, let alone 125 percent, or 100 percent for that matter. Those looking for mortgages should expect to put 20 percent down. Values in a bankruptcy sale would reflect this reality and then some. Based on the liquidation prices received by the FDIC and other distressed debt sellers, this mortgage paper would likely be scooped up for half or a third of the home’s value.

Buyers of the paper would immediately negotiate with borrowers to create loans that are conforming (80 percent LTV) and performing.

For instance, Selene Residential Mortgage Opportunity Fund purchased the mortgage secured by the home of Anna and Charlie Reynolds in St. George, Utah, for a deep discount, the Wall Street Journal reported in a front-page story. The Reynolds were struggling with a $3,464 monthly payment and the value of their home had plummeted.

Selene, run by Wall Street legend Lewis Ranieri,

buys loans to make a profit on them, not as a public service, but company officials say it is often more profitable to keep the borrower in the home than to foreclose. If a delinquent loan can be turned into a “performing” loan, with the borrower making regular payments, the value of that loan rises, and Selene can turn around and either refinance it or sell it at a profit.

Home values in St. George had plummeted in similar fashion to that of Las Vegas, only a two-hour drive away. Selene slashed the principle balance of the loan due from $421,731 to $243,182 and lowered the interest rate, reducing the Reynolds’ monthly payment to $1,573.

“Around 90% of Selene’s loan modifications involve reducing the principal,” James R. Hagerty wrote in the WSJ, “compared to less than 2% of the modifications done by federally regulated banks in the first quarter.”

And while many upside-down borrowers can’t even find a human to talk to about their loan, let alone sit down and renegotiate terms that will benefit both parties, Selene immediately tries to contact the borrowers on the notes they have purchased, “sometimes sending a FedEx package with a gift card that can be activated only if the borrower calls a Selene debt-workout specialist.”

It’s hard to imagine Fannie and Freddie being so proactive.

Ludwig von Mises explained that one government intervention leads to an endless succession of interventions to deal with the effects of the first and subsequent interventions. Ultimately, it comes down to two choices. “Either capitalism or socialism: there exists no middle way,” Mises wrote.

Likewise, there is no middle way to solve the housing crisis. For capitalism to work its magic and set underwater homeowners free, mortgage holders must be allowed to fail.

(Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply and Walk Away: The Rise and Fall of the Home-Ownership Myth. He received his master’s degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. French teaches in the Mises Academy.)

“Yad” (a Hebrew word) means “Open Hand”

By Charles Griffin,
CLU, ChFC
Family Wealth and Wisdom, Inc.

It expresses the power by which one can achieve something.  Silver, gold, money, all are akin to “Yad” today.  An open hand represents the power, the means to obtain things.  I think of the open hand and what can be done with it.  While a clenched hand, a fist,  can be used for defense, an open hand (yad) gives us the power to be industrious.

With it we can grasp a hammer with which to build.  We can hold a pen through which thoughts and ideas can flow, conveying messages, communicating with others today and into the future, influencing individuals and the world.  The “Yad” can even enhance what a closed fist can provide in the way of defense as our open hand enables us to hold, grasp, and manipulate objects and/or weapons used for protection.

Now think of your IBC (Infinite Banking Concept) program as your “Yad”.  Your IBC Program is your open hand that gives you the power to effectively and efficiently accomplish anything that you so desire.  It is a financial tool that is superior to any other.

With it you can build, you can help and/or provide for yourself and others.  You can influence minds.  You can get yourself and others out of debt.  A nation can become strong through private contracts with free men and everyone can become prosperous and independent, leaving the public welfare teat to shrivel up and wither on the chest of a once again vibrant republic.  Independence, pride in self reliance, the ability to provide true charity and to live prosperous and productive lives through our own industry and ability can once again cause this nation to flourish.

We are not yet dead, simply numbed by the politics of our day.  We need to find our “Yad” and use it, so go use it to build something bigger than yourself.

A Primer on Jobs and the Jobless

By Walter Block

[Originally published in Mises Daily, March 9, 2004]
www.mises.org

With the economics of employment and unemployment constantly discussed on the business pages and political campaigns, let us turn our attention toward fundamentals and root out some fallacies.

If the media tell us that “the opening of XYZ mill has created 1,000 new Jobs,” we give a cheer. When the ABC company closes and 500 jobs are lost, we’re sad. The politician who can provide a subsidy to save ABC is almost assured of widespread public support for his work in preserving jobs.

But jobs in and of themselves do not guarantee well-being. Suppose that the employment is to dig huge holes and fill them up again. What if the workers manufacture goods and services that no one wants to purchase? In the Soviet Union, which boasted of giving every worker a job, many jobs were just this unproductive. Production is everything, and jobs are nothing but a means toward that end.

“We must not allow government to create jobs or we lose the goods and services that otherwise would have come into being.”

Imagine the Swiss Family Robinson marooned on a deserted South Sea island. Do they need jobs? No, they need food, clothing, shelter, and protection from wild animals. Every job created is a deduction from the limited, precious labor available. Work must be rationed, not created, so that the market can create the most products possible out of the limited supply of labor, capital goods, and natural resources.

The same is true for our society. The supply of labor is limited. We must not allow government to create jobs or we lose the goods and services that otherwise would have come into being. We must reserve precious labor for the important tasks still left undone.

Alternatively, imagine a world where radios, pizzas, jogging shoes, and everything else we might want continuously rained down like manna from heaven. Would we want jobs in such a utopia? No, we could devote ourselves to other tasks — studying, basking in the sun, etc. — that we would undertake for their intrinsic pleasure.

Instead of praising jobs for their own sake, we should ask why employment is so important. The answer is, because we exist amidst economic scarcity and must work to live and prosper. That’s why we should be of good cheer only when we learn that this employment will produce things people actually value, i.e., are willing to buy with their own hard-earned money. And this is something that can only be done in the free market, not by bureaucrats and politicians.

But what about unemployment? What if people want to work but can’t get a job? In almost every case, government programs are the cause of joblessness.

 

Minimum Wage

The minimum wage mandates that wages be set at a government-determined level. To explain why this is harmful, we can use an analogy from biology: there are certain animals that are weak compared to others. For example, the porcupine is defenseless except for its quills, the deer vulnerable except for its speed.

In economics there are also people who are relatively weak. The disabled, the young, minorities, the untrained — all are weak economic actors. But like the weak animals in biology, they have a compensating advantage: the ability to work for lower wages. When the government takes this ability away from them by forcing up pay scales, it is as if the porcupine were shorn of its quills. The result is unemployment, which creates desperate loneliness, isolation, and dependency.

Consider a young, uneducated, unskilled person, whose productivity is $2.50 an hour in the marketplace. What if the legislature passes a law requiring that he be paid $5 per hour? The employer hiring him would lose $2.50 an hour.

Consider a man and a woman each with a productivity of $10 per hour, and suppose, because of discrimination or whatever, that the man is paid $10 per hour and the woman is paid $8 per hour. It is as if the woman had a little sign on her forehead saying, “Hire me and earn an extra $2 an hour.”

This makes her a desirable employee even for a sexist boss. But when an equal-pay law stipulates that she must be paid the same as the man, the employer can indulge his discriminatory tendencies and not hire her at all — at no cost to himself.

Comparable Worth

What if government gets the bright idea that nurses and truck drivers ought to be paid the same wage because their occupations are of “intrinsically” equal value? It orders that nurses’ wages be raised to the same level, which creates unemployment for women.

Working Conditions

Laws that force employers to provide certain types of working conditions also create unemployment. For example, migrant fruit and vegetables pickers must have hot and cold running water and modern toilets in the temporary cabins provided for them. This is economically equivalent to wage laws because, from the point of view of the employer, working conditions are almost indistinguishable from money wages. And if the government forces him to pay more, he will have to hire fewer people.

Unions

When the government forces businesses to hire only union workers, it discriminates against nonunion workers, causing them to be at a severe disadvantage or permanently unemployed. Unions exist primarily to keep out competition. They are a state-protected cartel like any other.

Employment Protection

Employment-protection laws, which mandate that no one can be fired without due process, are supposed to protect employees. However, if the government tells the employer that he must keep the employee no matter what, he will tend not to hire him in the first place. This law, which appears to help workers, instead keeps them from employment. And so do employment taxes and payroll taxes, which increase costs to businesses and discourage them from hiring more workers.

Payroll Taxes

Payroll taxes like Social Security impose heavy monetary and administrative costs on businesses, drastically increasing the marginal cost of hiring new employees.

Unemployment Insurance

Government unemployment insurance and welfare cause unemployment by subsidizing idleness. When a certain behavior is subsidized — in this case not working — we get more of it.

Licensing

Regulations and licensing also cause unemployment. Most people know that doctors and lawyers must have licenses. But few know that ferret breeders, falconers, and strawberry growers must also have them. In fact, government regulates over 1,000 occupations in all 50 states. A woman in Florida who ran a soup kitchen for the poor out of her home was recently shut down as an unlicensed restaurant, and many poor people now go hungry as a result.

When the government passes a law saying certain jobs cannot be undertaken without a license, it erects a legal barrier to entry. Why should it be illegal for anyone to try their hand at haircutting? The market will supply all the information consumers need.

When the government bestows legal status on a profession and passes a law against competitors, it creates unemployment. For example, who lobbies for the laws that prevent just anyone from giving a haircut? The haircutting industry — not to protect the consumer from bad haircuts but to protect themselves against competition.

Peddling

Laws against street peddlers prevent people from selling food and products to people who want them. In cities like New York and Washington, DC, the most vociferous supporters of antipeddling laws are established restaurants and department stores.

Child Labor

There are many jobs that require little training — such as mowing lawns — that are perfect for young people who want to earn some money. In addition to the earnings, working also teaches young people what a job is, how to handle money, and how to save and maybe even invest. But in most places, the government discriminates against teenagers and prevents them from participating in the free-enterprise system. Kids can’t even have a street-corner lemonade stand.

The Federal Reserve

By bringing about the business cycle, Federal Reserve money creation causes unemployment. Inflation not only raises prices; it also misallocates labor. During the boom phase of the trade cycle, businesses hire new workers, many of whom are pulled from other lines of work by the higher wages. The Fed subsidy to these capital industries lasts only until the bust. Workers are then laid off and displaced.

The Free Market

The free market, of course, does not mean utopia. We live in a world of differing intelligence and skills, of changing market preferences, and of imperfect information, which can lead to temporary, market-generated unemployment, which Mises called “catallactic.” And some people choose unemployment by holding out for a higher-paying job.

But as a society, we can ensure that everyone who wants to work has a chance to do so by repealing minimum-wage laws, comparable-worth rules, working-condition laws, compulsory union membership, employment protection, employment taxes, payroll taxes, government unemployment insurance, welfare, regulations, licensing, antipeddling laws, child-labor laws, and government money creation. The path to jobs that matter is the free market.

 

(Walter Block is Harold E. Wirth Eminent Scholar, Endowed Chair of Economics Loyola University, senior fellow of the Mises Institute, and regular columnist for LewRockwell.com. This article was originally published on March 9, 2004.)

Lower the Debt Ceiling

By Mark Thornton

Reprinted with permission from
http://mises.org/daily/5457/Lower-the-Debt-Ceiling

Currently, the big show in Washington, DC, centers around raising the debt ceiling. Congress began setting this ceiling in 1917 so that the Treasury could independently issue debt. The debt ceiling is like the limit on your credit card, except the federal government sets the limit on itself. When President Nixon took us off the gold standard in 1971, the national debt was $400 billion. The increase in the national debt last year alone was four times the entire debt in 1971.

Both Democrats and Republicans tell us that not raising the debt ceiling would have a negative — even catastrophic — effect on the American and world economies. They are in agreement on this. The only matter of debate is what concessions are necessary in order to establish a bipartisan majority to pass a bill raising the ceiling. Democrats seem to want larger cuts and tax increases, while Republicans want smaller cuts with no tax increases. The multitrillion-dollar cuts that they are discussing only occur over a ten-year time frame and do not balance the budget, so no one except Ron Paul is really discussing the kinds of budget cutting that would actually help the economy.

What we really need to do is to lower the debt ceiling. If Congress passed legislation that systematically reduced the debt ceiling over time, the economy could be rebuilt on a solid foundation. Entrepreneurs in the productive sectors would realize that an ever-increasing proportion of resources (land, labor, and capital) would be at their disposal, while companies that capitalized on the federal budget would have an ever-declining share of such resources.

Congress would have to cut the pay and benefits of its employees (FDR cut them by 25 percent in the depths of the Great Depression) as well as the number of such employees. Real wage rates would decline, allowing entrepreneurs to hire more employees to produce consumer-valued goods. Congress would have to cut back on its far-flung regulatory operations, which are in fact one of the biggest drags on the economy due to the burdenand uncertainty that Obama and Congress have created in terms of healthcare, financial-market, and environmental regulations. A recent study by the Phoenix Center found that even a small reduction of 5 percent, or $2.8 billion, in the federal regulatory budget would result in about $75 billion in increased private-sector GDP each year and the addition of 1.2 million jobs annually. Eliminating the job of even a single regulator grows the American economy by $6.2 million and creates nearly 100 private-sector jobs annually.

Under a reduced debt ceiling, the federal government would also have to sell off some of its resources. It has tens of thousands of buildings that are no longer in use and tens of thousands of buildings that are significantly underused — about 75,000 buildings in total. It also controls over 400 million acres of land, or over 20 percent of all land outside of Alaska, which is almost wholly owned by the government. There is also the Strategic Petroleum Reserve and many other ssets that could be sold off to cover short-term budget shortfalls.

Of course, reducing the debt ceiling would force the government to stop borrowing so much money from credit markets. This would leave significantly more credit available for the private sector. The shortage of capital is one of the most often cited reasons for the failure of the economy to recover.

Lowering the debt ceiling would force federal government budget cutting on a large scale, and this would free up resources (labor, land, and capital) and force a cutback in the federal government’s regulatory apparatus. This would put Americans back to work producing consumer-valued goods. Passing an increase in the debt ceiling merely perpetuates the myth that there is any ceiling or control or limit on the government’s ability to waste resources in the short run and its willingness to pass the burden of this squander onto future generations.

 

Mark Thornton is a senior resident fellow at the Ludwig von Mises Institute in Auburn, Alabama, and is the book review editor for the Quarterly Journal of Austrian Economics. He is the author of The Economics of Prohibition, coauthor of Tariffs, Blockades, and Inflation: The Economics of the Civil War, and the editor of The Quotable Mises, The Bastiat Collection, and An Essay on Economic Theory.

There Is Life After Default

By Peter G. Klein

Reprinted with permission from
http://mises.org/daily/5476/There-Is-Life-after-Default

My father was a historian, and he helped organize local events to commemorate the bicentennials of the Declaration of Independence in 1976 and Constitution in 1987. I particularly remember the Freedom Train, a traveling exhibit housing memorabilia such as original copies of the Declaration, the Constitution, the Louisiana Purchase document, and (I learn from Wikipedia, though I don’t remember these) Judy Garland’s dress from The Wizard of Oz and Joe Frazier’s boxing trunks.

Several years later, my dad gave a conference paper (unfortunately unpublished) entitled “The Constitution as Myth and Symbol.” He noted that for many Americans the founding documents, the Liberty Bell, Independence Hall, images of George Washington and Betsy Ross, etc., play the same kind of role as Britain’s crown jewels, the Bastille, or Lenin’s tomb.

The Constitution is important, in other words, not only for its text (some would argue the text is largely ignored today anyway), but also for its symbolic value. It represents a particular myth of the American founding, usually associated with reason and noble ideals (e.g., Bernard Bailyn, Ayn Rand, Schoolhouse Rock), but occasionally with power or material self-interest (e.g., Charles Beard, Bertell Ollman).

In following the debates over raising the US debt ceiling, I’m struck by the frequent claim that defaulting on public debt is unthinkable because of the “signal” that would send. If you can’t rely on the T-bill, what can you rely on? Debt instruments backed by the “full faith and credit” of the United States are supposed to be risk-free — almost magically so — somehow transcending the vagaries of ordinary debt markets. The Treasury bill, in other words, has become a myth and symbol, just like the Constitution.

I find this line of reasoning unpersuasive. A T-bill is a bond just like any other bond. Corporations, municipalities, and other issuers default on bonds all the time, and the results are hardly catastrophic.

Financial markets have been restructuring debt for many centuries, and they’ve gotten pretty good at it. From the discussion regarding T-bills, you’d think no one had ever heard of default-risk premiums before. (Interestingly, this seems to be a case of American exceptionalism: people aren’t particularly happy about Greek, Irish, and Portuguese defaults, but no one thinks the world will end because of them.)
“Treasuries are bonds just like any other bonds. There’s nothing magic, mythical, or sacred about them.”

So, isn’t it time to demythologize all of this? Treasuries are bonds just like any other bonds. There’s nothing magic, mythical, or sacred about them. A default on US government debt is no more or less radical than a default on any other kind of debt.

“What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom,” Adam Smith famously observed. Bankrupt firms, like bankrupt families, restructure their debt obligations all the time. The notion of T-bills as sacred relics to be once and forever “risk-free” seems more like religion than economics to me.

At the same time, there is another option for entities struggling to make their interest payments: asset sales. Bob Murphy, David Friedman, and Steve Horwitz have recently made this point. Public discussion on the US debt crisis assumes that the only options for meeting US debt obligations are increasing taxes, cutting spending, or both.

But asset sales are another viable option. There’s a huge literature in corporate finance (e.g., Shleifer and Vishny, 1992; Brown, James, and Mooradian, 1994; John and Ofek, 1995) that explores the benefits and costs of asset sales as a source of liquidity for financially distressed firms.

Of course, selling assets at fire-sale prices under dire circumstances is far from the best option, but as this literature points out, it is often better than bankruptcy or liquidation. One of the best-known results (documented by John and Ofek) is that asset sales tend to increase firm value when they result in an increase in focus. Would it really be so bad if the US government sold off some foreign treasuries and currency, the Strategic Petroleum Reserve, its vast holdings of commercial land, and other elements of its highly diversified and unaccountably bloated portfolio?

If asset sales aren’t feasible, is default really an option? Isn’t the global financial system dependent on the US dollar and the AAA rating of US government debt? Isn’t default “off the table,” as President Obama and Congressional leaders insist?

Of course not. Default and even repudiation are policy options that have benefits and costs, just as continuing to borrow and increasing the debt have benefits and costs. Reasonable people can disagree about the relevant magnitudes, but comparative institutional analysis is obviously the way to go here. (Unfortunately, most of the academic discussion has focused entirely on the possible short-term costs of default default, with almost no attention paid to the almost certain long-term costs of continued borrowing.)

In all the commentary, I’m a bit surprised no one has brought up William English’s 1996 AER paper, “Understanding the Costs of a Sovereign Default: American State Debts in the 1840s,” which provides very interesting evidence on US state defaults. It’s not a natural experiment, exactly, but it does a nice job exploring the variety of default and repudiation practices among states that were otherwise pretty similar. Here’s the meat:

Between 1841 and 1843 eight states and one territory defaulted on their obligations, and by the end of the decade four states and one territory had repudiated all or part of their debts. These debts are properly seen as sovereign debts both because the United States Constitution precludes suits against states to enforce the payment of debts, and because most of the state debts were held by residents of other states and other countries (primarily Britain).…

In spite of the inability of the foreign creditors to impose direct sanctions, most U.S. states repaid their debts. It appears that states repaid in order to maintain their access to international capital markets, much like in reputational models. The states that repaid were able to borrow more in the years leading up to the Civil War, while those that did not repay were, for the most part, unable to do so. States that defaulted temporarily were able to regain access to the credit market by settling their old debts. More surprisingly, two states that repudiated a part of their debt were able to regain access to capital markets after servicing the remainder of their debt for a time.

Amazingly, the earth did not crash into the sun, nor did the citizens of the delinquent states experience locusts, boils, or Nancy Grace. Bond yields rose, of course, in the repudiating, defaulting, and partially defaulting states, but not to “catastrophic” levels. There were complex restructuring deals and other transactions undertaken to try to mitigate harms.

A recent CNBC story on Europe cited “the realization that sovereign risk, and particularly developed market sovereign risk exists, because most developed world sovereign [debt] was basically treated as entirely risk free,” quoting a managing director at BlackRock Investment Institute. “With hindsight, we can say … that they have never been risk free, it’s just that we have been living in a quiet time over the last 20 years.”

Doesn’t sound like the end of the world to me.

 

Peter G. Klein is the author of The Capitalist & the Entrepreneur: Essays on Organizations & Markets. He is an associate professor and director of the McQuinn Center for Entrepreneurial Leadership at the University of Missouri and an adjunct professor at the Norwegian School of Economics and Business Administration. Klein teaches in the Mises Academy. He blogs at Organizations and Markets. See his webpage. Send him mail. See Peter G. Klein’s article archives.

Planet of the Taxpayers

By Jeffrey A. Tucker

See the full article at: http://mises.org/daily/5555/Planet-of-the-Taxpayers

The remake of The Planet of the Apes — the apes look real this time — purports to give the backstory of how it is that the world came to be governed by primates while the handful of humans are caged and abused.

The story line is so conventional that you could make it up just sitting there. A private-sector biochemical corporation rushes to test a drug that is supposed to reverse Alzheimer’s. It is tested on apes and the drug makes them strangely intelligent. But the same drug unleashes a killer virus among humans. The rest is science-fiction history.

The anticapitalism is so familiar that it is not even as disturbing as it should be. The CEO struts around in super-fancy suits, always in a rush from place to place, and his main job is to look cool and bark at everyone. Several times he snaps that drug development is all about profits. He tells a research scientist (paraphrasing): “Don’t talk to me about risk. Develop the drug. Then you get famous and I make money. That’s the way it works.”

Ah yes, corporate management, as told by the movies.

Then there is the privately owned ape prison where the animals are enslaved in cages before being taken to the laboratory to be pumped full of experimental drugs. They are shocked with electric prods, hit with clubs, fed gruel, and humiliated constantly by the jerk in charge.

How the viewer feels such deep sympathy for these poor creatures. And how satisfying once they plot their big break. Led by the most intelligent and strong among them — an ape learns to pick a lock — they reenact Bastille Day; they leap out the top of the ape prison and run wild on the city. But they don’t just kill people. No, they are compassionate and even humane. They only want to get back to their native habitat, where they can climb and leap from tree to tree.

Cheer the wonderful apes! How much they seem to embody our own plight!

How so? Well, if you get the ideological import of the film, we are all enslaved to reckless corporations and their relentless drive for profits. They experiment on us when they are good and ready and otherwise keep us in their cages and feed us gruel.

Not to put too fine a point on it: we are the apes!

What must we do about this? We must gain a new consciousness, come together, and plot our escape! Let us find the key, outwit our corporate masters, and run like hell until we find our paradise, which is surely somewhere where we can commune with nature and live without the corporate noose around our necks.

There’s just one problem: this has nothing to do with reality. Yes, corporations want profits. Surely those are better than losses. And how do they get them? By making stuff that we want to buy. If we don’t want the stuff, we need only not buy it. Refraining from spending is how we get the alleged noose off our necks.

The whole system in a free market operates not on a master/slave relationship but on an exchange nexus. All parties have to agree. If anyone is enslaved in this system, it is the corporation, which must slavishly try to extract money from us by giving us goods and services that we want. If they fail, they die. If they live, it is we who give them life.

“But there’s no need for any escape to anywhere. We are already home. It is the state that is the uninvited guest.”

The successful companies make profits because it turns out that we do want smartphones, good clothes at an affordable price, healthcare, cool home furnishings, laptops, food that doesn’t poison us, ice cream from time to time, fish from Vietnam, social-networking applications, fruit from Brazil, shoes from China, pianos from Germany, and electronics from Japan.

What’s more, these companies are not hogging their profits. On the contrary, many are urging us to pay into an ownership stake with them in the hope that we will earn dividends, and the value of our ownership claim will rise as the company becomes ever more valuable.

Some noose!

And yet it is true that a form of slavery exists and thrives today, all over the world. We do live in cages. We are prodded by electrical shocks. We are fed gruel of sorts. And they do experiment on us. I’m speaking of the relationship of individuals all over the world to governments all over the world.

They live off us entirely, because governments produce nothing of their own. They extract 40 percent of our wealth in one way or another and use that money to build their castles and their power. In fact, that is our main value to them. Otherwise, we would have no value at all.

In the name of providing us welfare throughout life, they loot us throughout life. In the name of providing us security, they humiliate us and treat us all like animals — and then have the gall to say that this system is all about public service. They manufacture billions of laws that no one can possibly keep and yet put us in jail when they decide to catch us breaking them. They order us to kill each other in the name of patriotism, but they are the only winners in this game.

The states have organized the whole of humanity along political lines. I’m an American. You are Chinese. You are Russian. You are Nigerian. You are a Swede. But look at it: most of these political borders are wholly arbitrary and even artificial. The sea-to-shining-sea idea was a concoction of 19th-century elites, not of the founders. There is nothing in history called “China” — the elites had to trample down historic regional dynasties to concoct the modern nation-state.

And with social networking and digital communication, we are discovering something extremely important. We all have closer connections — potentially more-profound relationships — with each other than any of us have with the individual states that rule us. The salient fact is that we are stronger together than apart. Together we are the overwhelming majority, and they the minority. As we’ve seen in the Arab Spring, we can come together to teach each other and plot and plan our future. Then we only need to act.

But there’s no need for any escape to anywhere. We are already home. It is the state that is the uninvited guest, the interloper who trashed the place, the invader who has distorted reality and violates our rights. We need only to assert our authority over ourselves and claim what is rightfully ours. They will be left to scramble, but their propaganda will have no effect, because we know the difference between the truth and their lies.

And what will we be left with? The freedom to serve each other, to cooperate with each other, to innovate and own. The result will be what Murray Rothbard called “anarchocapitalism,” or what Hans Hoppe called the “natural society” without the state.

So, yes, there is a sense in which this movie has it all exactly right. We are the apes. But it makes one giant error in radically misconstruing the difference between friend and enemy in the cause of liberation.

Jeffrey Tucker is the editor of Mises.org and author of It’s a Jetsons World: Private Miracles and Public Crimes and Bourbon for Breakfast: Living Outside the Statist Quo.

Compromise! Compromise! Compromise!

By Charles Griffin
Family Wealth and Wisdom, Inc.

This article appeared in the July/August edition of Lancaster County Woman

We hear of this daily in politics. It’s as if this is the right thing to do! Why is it that we need to move to the middle and compromise in order to be viewed as willing to get things done in order to move any issue forward? Maybe we shouldn’t be trying to move bad issues forward! Why do we tolerate such flagrant manipulation and/or violation of our own values, of our Constitution, and of the laws of nature?

So, just what is being compromised?

Usually, the right and proper thing to do is what is being compromised, and the result is that we end up with an idea, a principle, or a program that is inherently wrong. Compromising one’s opinion and/or self-serving goals may be a way to imply tolerance and to show a “go along to get along” mentality (until one can seize the opportunity to have it all), but compromising values and what’s right is just plain wrong! That’s right, it’s wrong! We should not have to choose between the lesser of two evils. Right is Right!

There are such things as absolutes. Truth, for example, is an absolute. None of us can determine, in and of ourselves, just what absolute truth is and what a right and proper value system is. We can only affirm it once we know it. Absolute truth was established a long time ago, prior to when anyone existed but the Creator himself. We can come to know truth only by knowing Him.

Sometimes we tolerate an injustice because we think that said injustice won’t affect ourselves very much. Far too often we simply don’t know what the effect will be upon ourselves and upon society around us. We’re too busy to be involved or we’re unfamiliar with what is really happening. While ignorance may seem to be blissful at times, it will never help one to be a proper steward of one’s assets.

Proverbs 27:23 tells us to be mindful of our flocks and to tend to our herds. How can we even come remotely close to knowing the condition of our assets today when we readily allow ourselves to be influenced by marketing and persuasive advertising to make less than prudent decisions? We do have freedom of choice! We can choose to resist the various offers and temptations that bombard us daily tempting us to indulge in immediate gratification. While pleasure is not inherently wrong, its consequences and ramifications need to be taken into consideration when making decisions.

Ignorance, itself, breeds wealth transfers. Fortunately, ways do exist for us to eliminate many of the wealth transfers that cause us to have our productivity diminished. We can be more in control of what we do with our own assets. In order to obtain this position in life, proper structure and a deliberate process is important.

Thus, working within the “rules” as established, and understanding how they apply to one’s own individual situation, can be a monumental task as we collectively work overtime to get ahead or to just maintain the status quo! We rely upon the “rules” established by the state to be fair and just while at the same time we depend upon imperfect and all too often self-serving individuals to administer and dose out “equity”.

Unfortunately, our system of government has become so self-serving so as to make it difficult for the average citizen to practice freedom of belief when it comes to their own personal beliefs. Things become more complicated. We fall prey to “Conventional Wisdom” telling us what to do, where and how to invest, only to end up with the fruits of our labor being transferred unknowingly and unnecessarily.

It’s not impossible to adhere to one’s personal belief system. It’s just very difficult to do so when what we produce through our being productive is stolen or diminished in value by the very people who are sworn to protect our personal rights and freedoms.

Parkinson’s Law, simply summarized, states that 1) “work expands to meet the time envelope allowed”, 2) “a luxury, once enjoyed, becomes a necessity”, and that 3) “expenses rise to equal income”. Parkinson’s Law is alive and well today. 1) It is extremely difficult for committees to produce good results. Things are typically put off until the last minute and we get a rushed-through result. 2) How many of us want to do without, even if we’ve borrowed in order to do with? 3) Our wishes will always exceed our means to pay for them.

Each of us has to decide how we can be productive. While a system, a plan, or a well-devised process can help one to avoid these very common pitfalls, if we choose to remain “average”, then we can expect to end up with an average situation. Being average does not mean retiring leisurely; very few Americans can do this. The ones that strive to rise above average refuse to accept the “Conventional Wisdom” handed down to them.

The Infinite Banking System is designed to give you back control of your productivity. By private contract between free men and women you protect and preserve what you’ve acquired. You have access to it whenever you desire and for whatever reason you desire, without asking for permission or approval of some lending institution or having to pay a penalty to access your money. You are not subject to the whims or manipulations of the market. You can control how your money is put to work and who benefits by it. You can finance your own business or that of someone else’s. You can take a more active role in cultivating a loved one’s career or be more generous in some way.

We can all do this! We simply need to know how. We need to become more responsible for our own outcomes. Don’t take your dreams and desires for granted. Minimize your wealth transfers and become more involved in how your wealth is used. You earned it. You should have a say in how it’s distributed. At Family Wealth & Wisdom, Inc., this is what we help people to do, to become. The cost of finding out how is minuscule. Ignorance could be devastating. Please call us with your goals and aspirations. We can help you get there sooner and more efficiently.