But, very few people ever ask why it is the supreme law of the land, or why it even has any power at all, and almost no one asks if it is the supreme law of the land, or if it has any power at all.

In fact, it is the Constitution that calls itself the “supreme Law of the Land.”  So if you ask someone why the Constitution is the supreme law of the land, they are likely to respond by telling you that it says so right there in the Constitution.  If you were to then respond to that by asking what gives the Constitution the right to declare that it is the supreme law of the land, they are likely to respond by saying that it is the supreme law of the land (or something to that same effect). This is what philosophers call a tautological argument, and what everyone else calls a circular argument.

Is the Constitution the supreme law of the land?

Well, the Constitution was a contract.  It was signed by 39 men at the Constitutional Convention (out of the 55 delatates).  Following this, the States held their own votes on ratification in which 1071 men voted in favor of adopting the new Constitution. But, all this tells us is that 1,100 men agreed to the Constitutional Contract.  What of the 16 delegates who refused to sign the Constitution?  What of the hundreds of men who voted against the ratification of the Constitution in their State legislatures.  And most importantly, what of the people who were not given the opportunity to vote for or against the Constitution?

Would it be right to assume that the people who explicitly refused to sign a contract should be forced to abide by it?

But, the vast majority of Americans were not allowed to vote at the time of the Constitution.  This included children, slaves, women, indentured servants, and (in many States) those who did not own property.  They had no say in their local or State governments, and thus no representation in the Constitutional Convention (which—by the way—was authorized by the Congress to amend the Articles of Confederation, not to replace it). The Revolutionary War, which ended less than 5 years before the Constitutional Convention, was fought over the issue of “taxation without representation.”   We must ask ourselves if being governed without one’s consent is substantively different than being taxed without one’s consent/representation.  And no, these arent just the musings of a lone libertarian.  According to recent polling, only 23% of America voters believe that the United States government has the “consent of the governed,” while 62% say that it does not.

Imagine if Verizon offered to provide you with wireless service in exchange for a fee, but for whatever reason, you EXPLICITLY DECLINED to sign the contract (even though most of your neighbors agreed).  Could anyone rightfully assume that Verizon would have the right to declare itself your provider? Of course not.

Lysander Spooner brilliantly pointed out that those who support the Constitution often use the right to vote as a method of justifying the legitimacy of the government. A simple examination of these arguments reveals that this argument falls into a severe tautological trap as well. For eaxmple:

• If I vote for the winning candidate, I have given my consent to his actions because I have sanctioned his platform. Furthermore, I have given sanction to the Constitution by participating in its institutions.
• If I vote against the winning candidate, I have still given my consent to the Constitution because the act of voting implies that I agree to the process outlined in the Constitution and that I would expect the losers of the vote to abide by the results of the vote had my candidate of choice won.
• If I choose not to vote, then I have no right to complain about the government because I have declined to participate in a “valid” process which could have yielded different results had I participated.

Thus, whether or not I vote, and whether or not I vote for the winner, I am giving sanction to the Constitution and to the actions of the government. We can easily see how this is a circular argument, akin to the expression “damned if you dont, damned if you do.” You dont have to be a trained philosopher to realize that this argument isnt a sound one.

Lysander Spooner argued that the Constitution actually bound no one. I agree with his logic, but have reached different conclusions.  I will argue that the Constitution does not bind very many people, but it does bind those (and only those) who have expliticly agreed to the Contract.

The President, Vice President, and members of Congress all take an oath upon entering office.  In doing so, they are explicitly giving their consent to the Constitution and agree to act in accordance to this Constitution.

Thus, the President, Vice President, and Congress are required by law to uphold the Constitution and its provisions, whether or not they like what it says. Failure to do so is a violation of their oath and a violation of the laws of the government that they have explicitly agreed to serve. The President’s oath reads

“I do solemnly swear (or affirm) that I will faithfully execute the Office of President of the United States, and will to the best of my ability, preserve, protect and defend the Constitution of the United States.”

Notice the final clause which demands that the President “preserve, protect and defend the Constitution of the United States.” Thus, the President must use his veto power whenever Congress passes a law that violates the terms of the Constitutional Contract. Failure to do so would be an explicit violation of the President’s oath and grounds for removal from office.

Similarly, the oath of Congressmen reads:

“I do solemnly swear (or affirm) that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; that I take this obligation freely, without any mental reservation or purpose of evasion; and that I will well and faithfully discharge the duties of the office on which I am about to enter. So help me God.”

This oath differs in that it requires members of Congress to ” support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same. [Emphasis added]” This is an important difference, as it not requires Congressmen to defend the Constitution against domestic enemies as well. Thus, every member of Congress has a duty to defend the Constitutional Contract from those who wish to undermine it. This must not only include other members of Congress who are bent on undermining the Constitution, but also must include protecting the Constitution against Presidents who rountiely violate the Constitution and their oath to the Constitution.

But if most members of Congress, as well as the President, Vice President, Cabinet, and most of the executive bureaucracy—the people who have taken an oath to the Constitution and who are thus bound by it—refuse to adhere to the Constitution or to their oath, then why should we, the American people have to abide by the Constitution?

Generations of Congresses and Presidents have routinely violated the Constitution and have trampled on the protections afforded in the 1^st, 2^nd, 4^th, 5^th, 8^th, 9^th, 10^th, 14^th, 15^th, and 21^st amendments. Their actions have rendered many of the above amendments nothing more than “dead letters.” The trampling of the Constitution by the very people who have sworn to protect it is not limited to the Constitutional amendments themselves, but also includes the routine violation of many of the protections contained in the body of the Constitution itself.

I have pointed out that members of Congress and the President have taken oaths requiring adherence to the Constitution. We The People, on the other hand have not. This fact alone leads to the logical conclusion that the Constitution does not apply to those of us who have not declared allegiance to it. And yet, many of those who ahve taken official oaths to the Constitution routinely violate it. Thus, the question must again be asked: if most members of Congress, as well as the President, Vice President, Cabinet, and most of the executive bureaucracy—the people who have taken an oath to the Constitution and who are thus bound by it—refuse to adhere to the Constitution or to their oath, then why should we, the American people have to abide by the Constitution?

In addition to Presidents and the Congress, members of the military take oaths of loyalty to protect and defend the Constitution as well:

“I, [name], do solemnly swear (or affirm) that I will support and defend the Constitution of the United States against all enemies, foreign and domestic [emphasis added]; that I will bear true faith and allegiance to the same; that I take this obligation freely, without any mental reservation or purpose of evasion; and that I will well and faithfully discharge the duties of the office on which I am about to enter. So help me God.”

The military oath not only requires that members of the armed services protect America against foreign invasion, but also requires that these members protect the Constitution from domestic enemies (those who have sworn allegiance to the Constitution but violate it) as well.

But, instead of taking their oaths seriously and defending the Constitution which they have sowrn to protect, Presidents, members of Congress, and members of the military have been much more willing to use their authority to force the American people to live under an unconstitutional (and nonconsensual) government.

I ask again: If the government refuses to abide by the Constitution, why should we?

The answer is that we shouldnt.

How long will we continue to allow Congress to rule over us using a “do as we say, not as we do” logic? The truth is that this has gone on long enough.

But, even if Congress, the President, and everyone else within the goverment followed their oaths perfectly, this would not be reason enough to follow their laws. The above statement stems fromt he simple fact that the vast majority of the American people have never sworn an oath of allegiance to the Constitution. A simple example can be used to understand why we are not bound to the Constitution—even if it is perfectly followed. Imagine that someone declares himself to be the new owner of your car without your permission. This man has no legal or rightful claim to your car, but that doesnt stop him from claiming ownership. However, this man is “nice enough” to allow you to use the car whenever you want. Thus, his “ownership” of your car doesnt interefere with your right to use the car in any way. But, does this mean that you should allow him to get away with the crime of claiming false ownership over your car? Of course not. It is true that while he still “allowed” you to drive your car whenever and wherever you wanted you probably wouldnt rebel against him, but that surely wouldnt meant hat you have accepted his claim of ownership over your car.

The vast majority of the readers of this article have taken no oath of allegiance to the Constitution or the the US Government (which itself is guilty of repeatedly violating the Constitution).  I have never read the words of the oath aloud, I have never signed an oath of loyalty to the United States or to the Constitution.  How then can anyone argue that this document binds those of us who have not taken a loyalty oath?

The Constitution itself was nothing more than a well orchastrated coup, designed to centralize the powers of the government into the hands of an elite few. The vast majority of citizens (and all of the slaves held) never had a proper say in the approval of the Constitution. And, as Lysander Spooner pointed out, one cannot sign a contract that binds future generations (wouldnt that be the greatest form of taxation without representation that is possible?). Thus, even if the Constitution somehow did bind all those living under it upon its ratification, it binds no one today but those who have explicitly agreed to it.

The Constitution does not bind those of us who have made no such explicit agreement. Thus, we have no legal or moral obligation to follow the “laws” put forth by Congress, the regulations created by Congress or executive agencies, or the executive orders and decrees made by the president.

I am not advising you to break the law—just because the law doesnt bind us does not mean that the government will not employ the use of men with guns to force you to comply with its laws and regultations. Just as an unarmed person would probably be better off (ie, would have a much better chance of survival) turning his wallet over to an armed robber who demanded the wallet, most people will find it easier to comply with the “laws” of the United States government rather than risk their own death or imprisonment.

But, even as we continue to hand the robber our wallet, this does not mean that we should recognize the legitimacy of the robber who demands tribute and restricts the liberty of so many millions of people.  It certainly does not mean that we should be happy to hand the robber our hard earned wealth.

Recognizing the illegitimacy of the Constitution and the United States government is a very important step. The more that people recognize this fact and speak about it, the more obvious it will become to the populace.

A critical mass of Americans is needed to recognize that we do not owe our allegiance to the Constitution.  Furthermore, this critical mass needs to realize that the United States government is illegitimate and that it has no moral right to tax, rule, or restrict the liberty of anyone who has not consented to be ruled.  Only when the people wake up and realize these facts will we be able to restore our lost liberties.

Americanly Yours,

Phred Barnet

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There are three methods of acquiring property: homesteading, voluntary exchange, and theft.   The first two methods are just, while theft is inherently unjust.  Taxation involves taking things without permission and must be classified as theft.

However, before deciding on whether or not taxation should be considered theft, the term “taxation” must be defined. I will define taxation as “a government mandated extraction of resources from individuals and/or groups, paid to support the aims of the government.”

The phrase, “mandatory extraction” is the key to understanding why taxation is theft. A mandatory extraction, by nature, is taken through the use of force or coercion, and not paid voluntarily.

Theft is always theft, regardless of who does the theft, how the theft occurs, and what excuses the thief makes to “justify” the theft.  The ONLY exception to this statement is when things are taken as restitution for a prior wrong (for example, if you stole $100 from a person, a court would be justified in taking $100 from you without your permission to repay the victim).

Before I go on, I must address a question that I will surely be asked by many readers: arent taxes special because they are taken by the government in order to provide people with their basic needs?

The answer to this question is a flat NO!

People have certain inalienable rights which should never be violated. It would be wrong of me to kill you, rob you, or physically harm you. Governments are made up of people, and are often created by people to secure their rights. Because governments are made up only of people, governments cannot have any rights that people themselves do not have. It simply does not make sense for this to be untrue. Rights are rights, people are people. Any claims that the government has more rights than anyone else is arguing that some people (the populace) should be considered inferior and subordinate to others (the government).

Taxation involves taking property from people without their consent; taxation is theft.

To quote myself: “If a man with a gun were to demand that unless you pay him 1/3 of your income he would lock you in a cage, he would be guilty of initiating the use of force with the intent of committing theft. It would not matter if the man promised to use this money to pay for a school for your children, for a new highway, or for a missile defense program. Taking things from a person without their permission is, by definition, theft.  Silver-tongued rhetoric may be employed to obscure this fact, but it cannot change it.

Taking something from another person without their permission is always theft and should be condemned as theft. It does not matter what the “reason” or “justification” for this action is.  It does not matter who committed this theft, what was stolen, or how many people told the aggressor to act.”

Examples of taxation as theft

Some of the taxes described below are not traditionally thought of as taxes, but they are taxes—they all meet the above definition of being a government mandated extractions for the purposess of supporting the aims of the government.

A government imposed minimum wage law prevents a person (a sovereign owner of him or herself) from selling their labor to a potential buyer at a mutually agreed upon price. This is theft of a laborer’s future earnings.

A government imposed ban on the sale of alcohol on Sunday prevents a person from selling their justly acquired resources to an individual willing to purchase them. This is theft of profits.

A government imposed business regulation prevents a business from using its justly acquired resources in the manner that it sees fit.  This is theft as well.

A mandatory income tax, imposed under penalty of imprisonment, enforced by men with guns is theft of the fruits of one’s labor. Stealing one’s labor is called slavery. A mandatory income tax makes the government a middle man in all labor transactions, and allows them to claim ownership of property that they did not justly acquire.

A mandatory property tax, imposed under penalty of imprisonment, enforced by men with guns is, by definition, a violation of property rights, and therefore is theft—no explanation should be necessary to prove this. But… property taxes are fees on products that have already been paid for. They are levied on the owner of a property. A mandatory fee on residents for the continued use of their own house is no different than the government charging a person rent to stay on their own property. Remember, a person who justly acquires property becomes the owner of that property, but if a person has to pay the government rent to occupy their own property, who is the real owner of the property, the homeowner, or the government?

A mandatory sales tax, imposed under penalty of imprisonment, enforced by men with guns is theft as well. A mandatory sales tax makes the government a middle man in all retail transactions, and allows them to claim ownership of property that they did not justly acquire. Sure, they can argue that sales taxes are imposed in order to pay for police, but this does not change the fact that this money was acquired through theft, and not through voluntary means. The mafia also forces businesses to pay a protection fee.

I would love to hear your comments on this article, but please dont post a comment or send me an email that says “taxes are necessary because without them, the government could not provide services.” I have addressed this above: taking money from someone without their persmission and then using that money to buy they something that they may or may not want is still taking something without permission [theft].

Please do not send me a message or post a comment telling me that taxation is “voluntary” and not theft because if I disagree with the taxes, I can move somewhere else. When it comes to taxes, we have three choices: paying a tax, or refusing to pay the tax and being arrested by men with guns and then locked in a cage, or leaving one’s family, friends, and property behind to search for a society that does not employ mandatory taxation. This fact should make it clear that taxation is not voluntary. A person who uses coercion to force another person to give up some of their property under threat of violence is guilty of extortion. Governments can have no rights that people do not have, and are therefore just as guilty of extortion as would be a person who acted in this manner.

Furthermore, the argument that if a person does not want to pay taxes, they can renounce their citizenship and leave the US to avoid taxes is false.  The US government does levy a tax on people who give up citizenship:

“Expatriation on or after June 17, 2008, may cause an expatriate to be subject to IRC § 877A, which was enacted as part of the Heroes Earnings Assistance and Relief Tax Act (HEART) Act of 2008. Generally, IRC § 877A imposes income tax on the net unrealized gain on property held by certain U.S. citizens or green card holders who terminate their US residency as if their worldwide property had been sold for its fair market value on the day before the expatriation or residency termination (mark-to-market tax). The Treasury Department and IRS have authority to issue regulations under IRC § 877A so further guidance is expected soon, though it has not been released yet.”

Finally, please do not send me a message or post a comment asking how things like schools, roads, or even national defense could be paid for without mandatory taxation. There exists a long history of voluntary provision of all these goods and services (check out this book for more information).

Furthermore, these items could be provided for through taxation in a purely voluntary manner if people were allowed to exercise their natural right to free association and choose their own government. Under voluntary government, taxation could no longer be considered theft, as those who did not wish to pay a tax could simply drop out of one government and sign a contract with another government.

Economist Walter Block argues that under voluntary government, one would have “the right to stay put, on one’s own property, and either to shift alliance to another political entity, or to set up shop as a sovereign on one’s own account.”

Governmental services can be provided on the free market as can any other service; a government would agree to provide certain services (possibly protection, roads, health care, or whatever) in exchange for a fee from a citizen. Thus, the citizen would be paying a purely voluntary tax.

In contrast to voluntary, contractual government, our government does not allow citizens to withdraw their support from the State.  It levies taxes on people without their consent.  These non-consensual taxes must be recognized and exposed for what they are: THEFT.

Americanly Yours,

Phred Barnet

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Many of the proposed solutions to this issue will improve the situation now, but create larger problems in the future.  However, there are some things that the Federal Reserve can do that will improve the current situation without mortgaging the future to do so.

As I wrote in my previous article, the Federal Reserve requires that banks maintain 10% of all checking deposits on hand.  For savings accounts, the reserve requirement is essentially zero (I say essentially because the Federal Reserve requires than banks hold a very small amount of money on hand in order to clear small overnight transactions, but when compared to the trillions of dollars held in savings accounts, this requirement is essentially zero).

Is this reserve requirement too high,  too low, or what?

To answer this question, we must first take a brief look at some of the important features of our monetary system [although the information below seems like a lot, I must assure you that it is brief and that numerous books have been written on the subject].  The information below can be found in many sources and I will be happy to provide them for you like.

Money is a medium of exchange.  We all know that exchange is necessary in just about every economy, and especially in one as large and developed as ours.  Without trade, each person would have to be self sufficient–they would have to grow their own food, make their own shoes and clothing, build their own houses, brew their own beer, and so on.

Trade allows each person to work in the field in which they have the greatest “comparative advantage,” when compared with others.  This simply means that people will choose to do the job that they are best at when compared to others.  For example, if I can grow 5000 pounds of wheat per day or work as a receptionist and answer 20 calls per day, while you could grow 1000 pounds of wheat per day or work as a receptionist and answer only 10 calls per day, I should seek employment as a wheat farmer and you should seek employment as a receptionist.  I might be better at both jobs that you are, but I have the “comparative advantage” in farming and thus should be a farmer.

In an economy with only two goods, exchange is easy–”I will grow wheat for you if you will answer my phones,” but as the economy expands this becomes harder to do.  It becomes difficult to make exchanges with someone in a barter economy if both parties do not have the goods that the other party wants.  As economist Walter Block explains the situation [page 200]:

“Consider the plight of the person who has in his possession a barrel of pickles which he would like to trade for a chicken.  He must find someone who has a chicken and would like to trade it for a barrel of pickles.  Imagine how rare a coincidence would have to occur for the desires of each of these people to be met.  Such a “double coincidence of wants” is so rare, in fact, that both people would naturally gravitate toward an intermediary, if one were available.  For example, the chicken-wanting pickle owner could trade his wares to the middleman for a more marketable commodity (gold) and then use the gold to buy a chicken.  If he did, it would no longer be necessary for him to find a chicken-owning pickle wanter.  Any chicken owner will do, whether he wants pickles or not.  Obviously, the trade is vastly simplified by the advent of the middleman.  He makes a double coincidence of wants unnecessary.”

If the government doesnt outlaw competing currencies, competition takes place over which good will be used as the “medium of exchange” until one or a few goods wins out and becomes widely accepted and used.  This material serves the same role as a middle man, it connects potential buyers and sellers in an efficient manner and facilitates trade.  Historically, from the time of the ancients to the Greeks and Romans, to the later Europeans, to the Chinese, Aztecs, Mayans, and so on, gold and silver have won out and been widely used as currencies.

Originally, banks were little more than storage facilities.   After all, if gold or silver is used in every transaction, it probably isnt smart to have all of your gold and silver lying around your house (especially back in the days before alarm systems).  People would bring their gold or silver to banks and would receive a receipt detailing the measure of either gold or silver, and often a description of the quality (ie, the receipt would read: 1 oz, 18KT Gold).  Over time, the receipts from the more reputable deposit facilities began to be used in everyday transactions.  If I held a receipt from a well known bank that promised the holder 1 oz of gold and I needed to purchase a product that cost the equivalent of 1 oz of gold, I might be able to convince the seller of the product to accept my receipt instead of making me go to the bank.

So, through time, these receipts began circulating and were known to be as “good as gold.”  Eventually, these receipts began to look more and more like what paper currency looks like today.  Here is a picture of some of these notes.  The image below is not to scale, but if you click the picture it will take you to the properly scaled image:

Often times, banks would realize that there was little chance that all customers would demand their gold or silver at once.  In these cases, banks would issue new currency that wasnt backed up and they would hope that people wouldnt redeem all of their notes at once.  Although dishonest and fraudulent, this was generally not a big problem for the economy as a whole–people were usually smart enough to deposit their money in banks that had the reputation of maintaining 100% reserves.

However, the government (governments both inside and outside of the United States) responded to this banking system by doing what it does best–interfering in the arrangements of private individuals.  Thus, governments often required that all banks redeem all bank notes, and not just their own notes.  This created a “moral hazard” problem because banks essentially had no reason to maintain high reserves.  When banks were not required to redeem the notes from other banks, they had an incentive to make sure that they kept high reserves (if they failed to do so, they would go out of business).  But, when the government required them to accept all notes, they knew that they could issue as many notes as they wanted and that these notes would be redeemed by other banks throughout the country.

This situation was one of the main causes of several banking crises in the 1800′s, including the Panic of 1819.  Furthermore, branch banking was prohibited which meant that banks had a tougher time dealing with the seasonal borrowing demands of their customers (ie, farmers might need to borrow more money during harvesting season and less after they have sold their crops).

And, while the “free banking period” has been described by many economists as the most stable period of banking in American history, what little instability that did exist was due to government intervention.  The most important government interventions were the ones mentioned above–the requirement that banks accept the notes of all banks and the prohibition on branch banking.

The government was able to use these problems as a justification for moving the banking system in a new direction.  Under this 2nd phase, the government prohibited banks from printing privately issued currency, but still allowed Americans to redeem their government issued bank notes for gold and silver.

This phase continued from the end of the Civil War through the early 1930′s, when President Roosevelt confiscated all gold and silver coins in the economy and changed the redemption rate of gold from around $20/oz to $35/an ounce (imagine losing 40% of the value of your money in one night).

During this third phase, money was still denominated in gold and silver, but could not be redeemed by American citizens.  Only foreign citizens and governments could redeem money for gold or silver.

This phase continued for several decades until 1971, when President Nixon removed America from the gold standard completely.  He was concerned with the rising costs of the Vietnam War and the entitlement programs of the Great Society, and became convinced that America’s economy would survive just fine off of a gold standard.  Not coincidentally, his move was followed by over a decade of record (for America) inflation, double digit unemployment, high interest rates, and general economic decline.  In this fourth phase, the American economy has been victim to a large number of economic booms, followed by economic busts, the national debt has soared, the value of the dollar has plumeted (the dollar has lost around 97% of its value, measured against gold since 1971).

To prevent massive rates of inflation and to restore order to the economy, the Federal Reserve must leave behind the policies that they have been following in recent decades.  One important step that it can do to achieve this is to announce a schedule for increasing reserve requirements until banks reach a level of 100% reserves.

Why 100% reserves?

Think back to the history of the banking system described above.  A bank deposit, whether redeemable for gold or cash is nothing more than an agreement between a bank and a person for the bank to hold some money now and return it later, on demand.

Thus, if I deposit $100 in a bank, the bank owes me $100.  That $100 is my property and is only being held by the bank.

Because that $100 is still my property, the bank has no [moral] right to loan out my property to someone else.  The Federal Reserve’s fractional reserve banking system exacerbates this problem because if I deposit $100 in a bank, they are only required to keep $10 on hand and can loan out the remaining $90 and thus create money out of thin air.  I described this process in detail in my last article, but this can result in $100 turning into nearly $1000.

My bank receipt entitles me to withdraw the $100 that I deposited, but there are 9 other people who now have receipts entitling them to withdraw that same money.  Thus is because there is now $100 in cash and $1000 in deposits. But this system is inherently immoral, after all, how can it be possible that 10 people own a legal title to the same property.

It is difficult to create an analogy that fits this situation because this practice itself seems like it just cannot be true.  Imagine that you go out of town on a long vacation and drop your car off the airport’s long term parking lot.  Pretend for the sake of this example that this lot is a valet lot and that you have handed the keys off to an attendant.  The attendant realizes that you will not be back for several months and decides to rent the car out to a friend for the next month.  This is immoral because the attendant has sold the rights to something that he does not own, but it is likely not to cause a problem as long as you dont come home early.  But, suppose you do come home earlier than expected to deal with an unexpected problem.  You will discover that the right to use your car is now being claimed by another person.  This clearly creates a problem, afterall, two people cannot both fully own the same property.

Banks act in a similar manner, however, their game is much less honest and much more problematic.  They essentially act as attendants who lend out your car to 9 other people (instead of just one) and hope that everyone’s schedules align just right so that no one will discover the fraud that has taken place.  The creation of new money by banks leads to price inflation and bubbles in the economy at first, but always ends in an economic downturn and bank failures.

As economist Hans-Hermann Hoppe wrote:  “Two individuals cannot be the exclusive owner of one and the same thing at the same time…  This is an immutable principle; it is a law of action and nature that no contract can change or invalidate.  Rather, any contractual agreement that involves presenting two different individuals as simultaneous owners of the same thing is.. objectively false and thus fradulent.  Yet this is precisely what a fractional-reserve agreement between bank and customer involves.”

This system functions fine as long as Americans use debit cards rather than cash, but even a small increase in the demand for cash (as opposed to debit cards) can cause bank failures.

It is this artificial creation of money which causes temporary economic booms (whether it be in the form of a housing bubble, a dot com bubble, or something else), but these booms are inevitably followed by a bursting of the bubble and widespread economic chaos.  This current economic crisis is the result of a rapid expansion of the money supply, low interest rates, and government intervention into the housing sector.

Requiring banks to maintain a 100% reserve requirement would tighten credit and would make it harder for banks to make poor investments.  Thus, bubbles dont emerge and they dont burst.  The economy functions much more smoothly and banks forced to respect the property rights of their customers.

However, banks cannot currently be required to hold 100% reserves without causing a lot of people to lose a lot of their hard earned money.  But, this doesnt mean that we cannot begin the transition.

Currently, banks are “only” required to maintain a total of $67.041 billion.  Because there are no reserve requirements for savings accounts and a 10% reserve requirement on checking deposits, this means that there is around $670.41 billion held in checking accounts.  There is just over $1.05 trillion held by banks in “excess reserves,” meaning that there is a total of $1117.436 in reserves.  Thus, it would be no problem for the Federal Reserve to require that banks hold 100% reserves for checking deposits.  Banks would still hold around $400 billion in excess reserves and banks would no longer be able to create a situation where multiple people own titles to the same money.

But doing so could cause other problems.  There would still be a disparity between required reserves for checking accounts and savings accounts.  Banks could get around this problem by urging customers to move their checking deposits into savings accounts.  So, any solution to this problem must require that checking accounts and savings accounts be subject to the same reserve requirements.

If we were to begin the process by requiring that banks hold 20% of both checking and savings deposits, the situation would be much better.  There is currently $5.0455 trillion held in American savings accounts.  Thus, a 20% requirement would mean that banks would need to hold $1.0091 trillion.  If we add 20% of checking accounts [$134.082 billion], we are left with a requirement of $1,143,182,000,000 which puts us just under the amount of money actually held in reserves by American banks.  If banks are given several weeks or even a month to meet these new requirements, they would easily be able to do so by restricting their lending.

In order to get to a 100% reserve requirement, it would actually be acceptable for the government/Federal Reserve to print additional money, as long as it did not expand the money supply beyond what was necessary to get to 100% reserves.  The reason for this is that there is a great deal of money that is in the economy but that is not in print.  Recall from above that a $100 deposit can easily become nearly $1000, but only $100 in cash actually exists.  If we are to require 100% reserves and still prevent bank failures and people losing their deposits, it would be acceptable for the government to print the additional $900 created in the above example and send it to the banks.  This would mean nothing more than the government printing money that was already in existence on the ledgers of banks, and will make the transition to 100% reserve banking much smoother and quicker.

Would a 100% reserve requirement stifle economic growth?

If banks are required to maintain 100% reserves, it is clear that they will loan out less money.  While this is true, it does not mean that economic growth will be stifled.

Banks will still be able to make loans under a 100% reserve requirement.  These loans would be made from funds deposited in CDs.  CDs are a form of time deposit bank accounts in which a customer will deposit funds in an account for a specified time at a specified interest rate.  For example, a customer might deposit $100 in 1 year CD at a 5% APR.  During this period, the customer is not allowed to access their funds.  After the year, the customer would receive $105 and they would be allowed to roll the funds over into another CD or withdraw their funds.  The banks would be able to pay this sum by loaning that $100 out to a borrower at a rate higher than 5%.

Thus, banks would still be allowed to loan out funds and borrowers would still be able to receive loans to purchase houses, expand their businesses, or for any other purpose.  Loans would be made without banks arbitrarily creating new money.  Bank failures would no longer be a threat because banks would be required to maintain 100% reserves.  Interest rates would adjust naturally and would reflect the market prices for agreements between bank customers, banks, and borrowers, with banks essentially serving as middlemen between lenders (depositors) and borrowers.

Sound Money

Maintaining a 100% reserve is a great first step, but it should not be seen as the last.  The banking system must be integrated with the Federal Reserve’s supply of gold.  This would return us to the days when money was actually money (a medium of exchange that had value to people) and not just numbers printed on paper.  It would return us to a stable banking system and we would see the return of stable and slightly falling prices (which was the norm from 1800-1913).

The first thing that we need to do is figure out what the new total money supply would be if there were 100% reserves.  If we add the $5.0455 trillion held in savings accounts and the $670.41 billion held in checking accounts, we come to the total of $5.71591 trillion.

The Federal Reserve currently holds 261.5 million oz of gold.  Strangely, they value this gold at $42.22 per oz, even though the current market value of gold is around $1,200 per oz.

In order to readjust the value of gold relative to the dollar, we must divide the $5.71951 trillion by the 261.5 million oz of gold.  After doing so, we find that gold would need to be pegged at the new price of $21,871.93 per oz (as of Monday, May 24, 2010).

This change in the price of gold would not cause problems in the economy or even cause a massive price inflation.  It would essentially mean multiplying the price of everything the same number, meaning that all wages, prices, and costs would move together and would do so only one time.  This is the case if and only if banks are required to maintain 100% reserves.

If we multiply everyone’s income, wealth, and the prices they pay for goods and services by 18, then no one is made any better or worse off by this intervention.  But, what we have done is stabilize the banking system in order to ensure that everyone actually has a claim to their own funds.  This would be far better than the current system, in which multiple people hold claims to the same money.  It would also prevent the Federal Reserve and other banks from engaging in monetary inflation which can lead to price inflation, the boom and bust business cycle, and a destabilized economy.

Then What?

Following these measures, the Federal Reserve and its member banks must guarantee that customers may redeem their money for its equivalent value in gold.  This move is common sense: if we are to return to sound money and to a gold standard, we must ensure that money is redeemable in gold.  This would essentially make paper money equivalent to a ticket which can be exchanged for gold at any time.

After this is done, Congress, the Federal Reserve, and the Treasury Department must take the necessary steps to allow competing currencies.  While gold has historically been the commodity chosen to serve as the medium of exchange, other metals including copper and silver have been used as well.  The government must allow banks to issue their own currencies which can be denominated in which ever manner the issuing banks/mints choose.

It will be up to retail stores, businesses, and individuals to decide which currencies they will accept as payment for their services.  The differences in currencies will undoubtedly be smoothed out by banks issuing debit cards which allow merchants to accept payments in the currency of their choice, despite the fact that the person paying for the services may be paying in a different currency.  If this sounds unfeasible, think about what happens when you go out of the country and make purchases: you pay for goods in a foreign country using your debit or credit card, the foreign merchant gets paid in his local currency, you pay in American dollars, and the bank facilitates the transaction.  The same process could occur at merchants within the United States with little difficulty.

The Federal Reserve and Congress have the ability to stop hyperinflation, further banking failures, the business cycle, and other economic disruptions.  However, their ability to do so depends on the implementation of the above policies.  We must return to a situation where each dollar was only owned by one person.  It is just not feasible to have a situation where two individuals have the same legal claim to ownership over the same property.  We must return to sound money, backed by a commodity which itself is valued by individuals.  We must end the legal monopoly status of Federal Reserve notes and allow individuals to accept payments and pay for goods and services with the currency of their choice.  Failure to do so could have consequences dire enough to make the current economic crisis look like a drop in the bucket.

Americanly Yours,

Phred Barnet

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Ok, clearly the chart above indicates that something unprecedented and drastic has been happening in our banking system for the past two years.  But you are likely asking “what does this mean?”

The United States’ banking system is a fractional reserve system, meaning that banks are not required to hold 100% of the money deposited.  Currently, the reserve requirement (the percentage of deposits that banks are required to maintain) is 10% for checking accounts.  Thus, if you were to deposit $100 of your money into a checking account, the bank would legally be required to keep $10 and could lend out $90 to those borrowing money from the bank.  Any amount they kept on hand above $10 would be considered “excess reserves.”

For those interested, the data used to make the above graph can be found here.  A quick glance at either the data or the graph shows that for most of the past 50 years, banks have maintained reserves at levels very close to the levels mandated by the Federal Reserve.  On August 1st, 2008, banks maintained excess reserves of $1.875 billion.  One month later, excess reserves shot up to $59.482 billion.  On October 1st, excess reserves equaled $267.159 billion, reaching $558.821 billion on November 1st, and $767.332 billion on December 1st.  On April 1st, 2010 (the last date for which data is available), excess reserves totaled just over $1.05 TRILLION, or around 1000 times higher than they were 20 months earlier!

You are likely still asking what all this means.

Well…

What this means is that banks are keeping reserves on hand above and beyond the ratios required by the Federal Reserve.  Banks are likely doing this for several reasons:

1)  The banks know that many of they loans they initiated over the past several years are likely to default.  These loans were purchased by these banks using the cheap credit made available by increases in the money supply and low interest rates.  Thus, banks are keeping the “excess” capital on hand so that they can pay the interest on the money that they borrowed to make these faulty loans–even if there is a large number of loan defaults.

2)  This ties in with the reason above, but these banks are worried about the consequences of asking for another large bailout from American taxpayers.  The government bailed out these banks a year and a half ago, despite widespread public opposition and used the rationale that doing so would save the economy.  However, since this bailout, the economy has only worsened.  The banks know that it is unlikely that the American people would be as willing to allow their government to hand rich bankers taxpayer money again.

OK, so the banks arent lending right now, but what does this mean?

There is another major reason why the banks arent lending: we are in the midst of a pretty serious recession.  No one knows how long it will last, and my guess is that no one really knows just how bad it is right now.  With the exception of the Austrian Economists, not too many economists out there even say this crisis coming–much less lasting this long.

With so many people unemployed, so many businesses failing, and so few businesses expanding (or new businesses being opened), there just isnt a massive demand for loans.  This gives banks another reason to continue to hold “excess” reserves.

But, the economy is slowly starting to pick up.  As this happens, banks will begin to loan out more money and will eventually start to lower their reserves until they reach levels of excess reserves near the historical rate (in other words, near zero).  In fact, it is already happening:  On February 1st, excess reserves were $1.162 trillion, on March 1st, excess reserves were $1.120 trillion, and on April 1st, excess reserves were $1.05 trillion.  In other words, banks decreased their excess reserves by about 9.6% between February 1st and March 1st.

As the economy recovers and banks make additional loans, this will increase the supply of money in the economy.  An artificial increase in the supply of money is, simply put, not good.  When there is more money in the economy chasing after similar amounts of goods and services, the result can be nothing else but an increase in prices (relative to what prices would have been without the increase in the money supply).

The effects of the increases in lending brought about by an economic recovery will increase the money supply by much much more than $1 trillion.  As mentioned above, under our fractional reserve system, banks are only required to hold 10% of checking deposits and are able to lend out the remaining 90% to borrowers.  However, the process doesnt stop there:  if you deposit $100, the bank holds $10 and loans out $90 to someone else.  When that person deposits their money in a checking account, their bank is then able to loan out $81 while only holding $9, and so on.  As this process continues, banks effectively create (out of thin air) over 9 times the money that is held in their vaults and your $100 becomes nearly $1000 in the economy:

Thus measure of money supply is known as the M2 money supply.  Thus, if banks return to their historical activities and maintain reserves at a level just above the reserve requirement rate, the result could be an increase in the M2 money supply of around $10 trillion.  Currently, the total M2 money supply is just over $8.4 trillion, thus if banks start to lend out their excess reserves, the M2 money supply will more than double.

The implications of this are quite sobering.  If the economy does not improve and continues to muddle along, things will be bad.  Unemployment will remain high or possibly even creep higher, the stock market will continue to drop, people will continue to suffer and so on.

However, if the economy shows marked improvement and begins to accelerate, things will be much worse.  At first, this might seem counter intuitive, but we must remember to take the above information into account.  When the economy improves, banks will start to lend out their “excess” reserves.  Because of the fractional reserve nature of the United States’ banking system, each dollar that banks hold in excess reserves has the potential to become nearly $10 when loaned out.

At first, this will make it look like the economy is growing at a very fast rate.  After all, the newly created money is being spent by lenders to purchase things that werent being purchased before.  The increased demand for these goods raises their prices (and initially the profits of the businesses selling these goods).  This may result in a rise in wages for the employees in that sector of the economy.  However, when monetary inflation occurs at a rate as high as the rates we are likely to see, this phenomena spreads throughout the whole economy.  Thus, prices and wages will generally rise throughout the economy.

Anyone who thinks that this is a good thing is fundamentally wrong.  We often are presented with the argument that increasing the money supply increases incomes and is necessary because without such increases “there wouldnt be enough money to go around.”  As economist Tom Woods wrote in his best selling book, Meltdown, “It is to misconceive the nature and purpose of money completely to think its supply needs to expand in order to allow more transactions to take place.”  In fact, in a system with a stable money supply, “prices fall over time and the value of money rises.”  The reason for this is that “as output increases, the monetary unit simply gains in purchasing power.”

Monetary inflation (and the resulting price inflation) does not mean greater standards of living–the opposite is true.  What monetary inflation does do is destabilize the economy, increase the inequality of wealth distribution, and make society less better off than it would be under a stable monetary system.

Just ask the citizens of Zimbabwe if the massive increase in their nation’s money supply have made them better off.  In 1980, each Zimbabwe dollar was worth $1.59.  After 30 years of constantly increasing the money supply, their economy is in shambles, and their money is worth less than the paper it is printed on.   “In March 2007 Zimbabwe’s inflation rate passed 50% a month, a good threshold for defining “hyperinflation” and equal to 12,875% a year. Since then, it’s gotten much worse.” In late 2008, their price inflation rate reached the incomprehensible rate of “80 billion percent a month. That means around 6.5 quindecillion novemdecillion percent a year–or 65 followed by 107 zeros. To get a handle on it, realize that it’s equivalent to inflation of 98% a day. Prices double every 24.7 hours.”

Well then, if the argument that printing new money makes everyone in the economy better off has even a slight grain of truth in it, then Zimbabwe must be among the richest country in the world!  After all, Zimbabwe is following the economic philosophy of the “brilliant” John Maynard Keynes and his disciples who have argued that increases in the money supply bring about prosperity by accelerating spending.  Everyone knows that this is not the case, however.  Zimbabwe is among the poorest nations in the entire world and recorded a 94% unemployment rate last January.

Does this same fate await America?  Lets just say that something like this is possible.  The Federal Reserve has been printing money for too long and has accelerated these practices in recent years and months.  With a low reserve rate of only 10%, the Federal Reserve is just asking for trouble; when the economy recovers, things have the potential to spiral out of control quickly and result in a massive and destructive hyperinflation.

Yes, this can be slowed or even stopped.  But, before you get your hopes up, ask yourself  if the US government has ever learned from its mistakes or the mistakes of others.

Americanly Yours,

Phred Barnet

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For confirmation of this, check out the C-SPAN coverage of this issue, especially the speeches starting from around 70 minutes until they begin voting on the rule.

President Obama promised that American people that he would pursue a bipartisan approach to health care reform.  Unfortunately for the American people, President Obama did no such thing.  Representative Paul Ryan (R-WI) and several other Republicans have been begging President Obama and the Democratic leadership to listen to other ideas and to move to attack some of the problems with health care that the vast majority of Americans agree on.  This bill is not bipartisan in any remote sense of the word.  In a clear sign of both idiocy and doublespeak, Nancy Pelosi disagreed and declared that a “bill can be bipartisan without bipartisan votes.” The argument here was that because Democrats have included a few small ideas that Republicans and independents support in the bill that it can be called bipartisan.

In fact, the only thing that can even be said to be bipartisan about this bill is the opposition to it.  There are no Republicans supporting this bill; it is opposed by every single Congressional Republican and a number of Congressional Democrats.

But, even if this bill had been a perfect example of bipartisan compromise, it is still wrong.  On top of being immoral and undemocratic, this bill is blatantly unconstitutional.

Alas, they have passed it and the battle is over.  What do we do now, you ask?:

Well, we have three choices here.  We can:

1)  Admit the fight is over, accept this new national health care system, its immense costs and potential to result in a level of care much lower than the current level.  Accepting this option is akin to tacitly accepting that our federal government no longer has any limits and thus, is no longer bound to the contractual restraints placed upon it by the Constitution.

2)  Accept that the battle is over, but focus our efforts on repealing this bill.  Republicans have little chance of retaking the Congress in November, and given their history of supporting big government programs, there is little if any reason to believe that they will seek to implement a health care system based on the principles of freedom.

3)  Take the passage of this bill as a setback and as the loss of a major battle, but regroup and get ready for a major guerrilla offensive.  The centralized approach to fighting this bill should be abandoned for now.  This battle simply cannot be fought on the national level right now.  The answer is for a number of different methods of attacking this plan.

Clearly, I favor option 3.  Under this option, we must urge our State legislators to nullify this and all future health care bills coming from D.C.  We must urge our State to follow the lead of Idaho and sue the federal government (however, we should also realize that it is unreasonable to expect federal courts to curb federal power).  Individuals and groups must follow a similar strategy and file lawsuits against the implementation of this bill.  One good thing about this bill is that many of its provisions do not take effect until 2013 and 2014, giving us plenty of time to try out various strategies

The important thing here is to not rely on only one strategy.  We must favor a decentralized strategy for fighting this bill for the same reason that we must facor a decentralized system of government.  The consequences of failure in a “one size fits all” system are too great.  By fighting a number of separate battles against the bill, we can be sure that the failure of one strategy will not lead to our total failure.  Additionally, the beauty of this strategy is that the success of any one of the single strategies that we are using to fight this bill could result in the death of this bill.

The Constitution was a contract between the States to create a federal government.  In creating the federal government, the Constitution also served as a contract between the States and the federal government.  The Constitution delegated certain powers to the federal government and reserved the remaining powers to the States (and to the individual people).

Article 1, Section 8 of the Constitution delegated certain powers to the federal government.  The 9th and 10th amendments to that Constitution placed every power not given to the federal government in the hands of the States and the people.

[The 9th Amendment reads: "The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people."]

[The 10th Amendment reads: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."]

This is the plain and simple truth.  Anyone who argues that the Constitution must adapt to changing times is ignoring the fact that the Constitution contains the mechanisms for this adaption in the amendment process. Any expanse of federal power that is not covered by the Constitution or by subsequent amendments is a direct violation of the Constitutional contract.  Thus, if the federal government wanted to lawfully implement a national health care system, Congress and the States would need to ratify a Constitutional Amendment granting this power to the federal government.

A contract obviously cannot be expected to enforce itself–Party A must be vigilant to ensure that Party B does not ignore the provisions of the contract and take advantage of Party A.  But, suppose that Party B does take advantage of Party A–what now?

The States as sovereign actors must do their parts to reject the improper violations of the Constitutional contract by the federal government.  This means that State governments must refuse to implement–or to allow the implementation of–this violation of the Constitutional contract by one party.

An illegal law is no law at all.  A law that expressly violates the Constitutional contract is invalid and can be ignored by the States.

37 of the 50 States are considering bills to nullify this health care bill.  That is, these States are refusing to allow the federal usurpation of local power to continue (at least in the area of health care).  Several days ago, Idaho became the first State to sign a bill into law requiring the State’s Attorney General to sue to federal government over this bill.  States like Virginia, Arizona, and Utah have also passed nullification bills and are only awaiting the signature of their governor.  Many of these States are considering laws that would lead to the imprisonment of any federal official attempting to enforce any law which is not explicitly authorized under Article 1, Section 8 of the Constitution.

There has been a long history of nullification to prevent the federal government from implementing unconstitutional or unjust violations of the Constitutional contract.  This history has included but is not limited to the following:  attempts by Northern States to nullify the propsed military draft in the War of 1812 and actions by Maryland and Wisconsin to nullify the Fugitive Slave Act (and to charge anyone who took an escaped slave back into captivity with the crime of kidnapping).

More recent examples of nullification include (but are certainly not limited to) the nullification of the REAL ID Act by 25 States (effectively blocking the federal government from implementing a national identification card) and the nullification of federal marijuana laws by thirteen States.

We can and must apply these same principles to this unwanted health care bill.  Many people have taken time in the last year plus to contact their Congressmen and Senators to tell them to vote against national health care.  This approach has failed, but the fight is far from over.  We can win this fight!

We need to put the pressure on our State officials to consider nullifying this and all other unconstitutional violations of our rights.  Please take some time this week to contact your State representatives to tell them to support nullifying this and any other federal health care bills.

Just as in any contract, one side could not grant himself the right to edit the terms of the contract and do as he pleased, the federal government cannot ignore the terms of the Constitutional contract and do as it pleases.  The States must do all that they can to prevent any further violations of the Constitutional contract by the federal government.

Nullifying unconstitutional laws will show the federal government that the States are serious upholding the Constitutional contract and its balance of power.  The federal government will be less likely to pass unlawful laws if they know that these laws will not be enforced on the State level.

Enough violations of a contract–any contract–by one party eventually render that contract null and void.  If the federal government continues to violate the Constitutional contract and encroach on the domain of the States, the States must reserve the right to peacefully withdraw from the contract and fully control their own affairs.

Americanly Yours,

Phred Barnet

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To put this announcement in context, I want you to imagine a 400 lb man who was eating 3100 calories per day a year ago.  A year ago, the man started eating 3555 calories per day (an increase of 455 calories–14.67%) and gained 64 lbs during the past year and now weighs 464 lbs–an increase of 16%.  Now, the even fatter man realizes that his weight has become an even more serious problem and he hatches a plan to deal with it.  He decides that he will freeze the increases in his caloric intake from most snacks for the next three years.  However, he decides that instead of cutting his meal sizes, he will actually continue to increase their sizes.  He will also increase the sizes of some of his snacks, while freezing the growth in the sizes of other snacks.  He concludes that these meals and snacks are essential to his survival and that therefore he must increase their sizes if he wants to get healthy.

Does this example sound far fetched?  It isnt.  The numbers used above are scaled down numbers from our federal budget.

Our 2009 budget, passed in 2008 under President Bush called for $3.1 trillion in spending.  Of this, $1.89 trillion was “mandatory”–it funded government social welfare programs.  These are the meals described above.  The remaining $1.21 trillion was considered discretionary funding–these are the snacks described above.

But, included in the discretionary funding of that budget was $515.4 billion for the Defense Department, $145.2 billion for the War on Terror, $37.6 billion for the Department of Homeland Security, and $44.8 billion for the Department of Veterans Affairs.  That total is $743 billion.  These are the snacks that the man above will not only continue to eat, but will actually increase the size of.

Now, lets look at the 2010 budget which was proposed by President Obama last February.  This budget had $3.55 trillion in spending.  Of this, $2.184 trillion was “mandatory.”  This is an increase of 15.6% in only one year.  As you can see, the costs of Social Security, Medicare, and other programs are rising rapidly.

The remaining $1.368 trillion was considered discretionary.  The cost of these snacks increased by $13.1% in that single year.

In other words, while discretionary costs are rapidly rising they are not the biggest problem.  Our mandatory costs are not only bigger than our discretionary costs–but mandatory costs are increasing at a much faster rate than are discretionary costs.

But,this budget included $663.7 billion for the Defense Department, $52.5 billions for the Department of Veterans Affairs, and $42.7 billion for the Department of Homeland Security.  The total here was $758.9 billion.  This is an increase of about 2.14%.

If President Obama were proposing to cap the annual growth in the total budget at 2.14%, the majority of Americnas would be pleased.  However, as mentioned above this spending freeze will not include mandatory spending–the biggest and fastest growing part of the budget.  But, just like the fat man described above, our national debt increased by 16% in President Obama’s first year–and just like that fat man, we are going to increase what we eat.

The government is cooking itself bigger meals as well as increasing the size of its snacks.  This is not the way to get in shape.  Using our analogy of the overweight man, we see that at best, this will only slow the rate at which the man gets fatter.

And, we would be fools to think that the President’s freeze on discretionary spending actually means a freeze on discretionary spending.  The news of the spending freeze was leaked the other day, but this morning news leaked that the President was going to request a 6.2% increase in the education budget.

Of course this money will come with strings attached.  Federal money always comes with strings attached and efforts to increase federal control.  Federal funding for education is nothing more than a move by the federal government to expropriate the money from Americans through taxes and then sell that money back to State education departments and local districts in exchange for influence.  The Carter Administration nationalized education in 1979 and the effect has been disastrous: steady declines in education all across the nation and sharp increases in costs of education.  These federal actions have made the American people pay more money for less education.  But, we cant be surprised by the Obama Administration’s efforts to further erode local and family control over yet another aspect of our lives.

On top of this, President Obama will announce an $8 billion high speed rail initiative in Florida tomorrow.  This sounds nice, but the fact of the matter is that the high speed rail systems proposed by the government is a horrible idea that will be extremely costly, bad for the environment, and will not be high speed!  This isnt actually a new plan, but rather a rehashing of a plan that President Obama put forward last year.

The good people at the Georgia Public Policy Foundation put together a report on this plan last year.  You can find that report here.  Here are a few excerpts:

“The FRA is not proposing to build 200-mph bullet trains throughout the U.S. Instead, in most places it is proposing to upgrade existing freight lines to allow passenger trains to run as fast as 110 mph – which means average speeds of only 55-75 mph. This would actually be slower than driving for anyone whose origin and destination are not both right next to a train station.” (Page 6)

“Even with these optimistic assumptions, high-speed rail reduces corridor transportation energy consumption by only 8.3 percent. This means the operational energy and greenhouse gas savings fall to zero if we assume instead that automobiles and airplanes are, by 2025, just 8.3 percent more energy efficient than they are today. If automakers meet Obama’s fuel-efficiency standards, autos will be more than 30 percent more efficient in 2025 than they are today, so high-speed rail will actually be wasting energy.” (Page 21)

“the FRA system will carry each person an average of 58 miles per year.” (Page 25)

But, these are just the two spending increases that have been leaked today.  If we factor in the “mandatory” increases in social welfare programs, the increases in defense and intelligence budgets, and the new jobs/stimulus programs that Congress is almost sure to pass, we are still looking at heafty budget increases.

The man in my analogy would be stupid to not go on a diet.  Our government should do the same.  It needs to stop eating snacks where it can and begin to reduce the size of its meals to a sustainable level.

If President Obama is serious about preventing the looming debt crisis from wiping out decades of economic growth, he needs to change his tone.  Instead of just freezing spending in certain areas while allowing the already bloated budget to expand, Mr. Obama should cut the budget where possible.  He should also look for ways to stop the increases in the costs of mandatory spending before it is too late.

But of course, it may already be too late.

Americanly Yours,

Phred Barnet

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Economy:

The economy continues to deteriorate under President Obama’s leadership. When President Obama pitched the “stimulus” bill to the skeptical American public, we were told that if this “crucial” bill was not passed soon (ie, before Congress had ample time to read the bill) then the economy would face devastating consequences.  This was of course a well calculated and bold faced LIE.  The fact of the matter is that the majority of the spending in the “urgent stimulus” bill were not going to be spent for over a year.  We were warned by the Administration that failure to pass the bill would cause unemployment to skyrocket and could cause it to reach as high as 9%, but passing the bill would keep unemployment from raising above 8% (see this chart put out by the Obama Administration to urge support for the “stimulus”).  So, we passed the bill and despite (or because of) this, the official unemployment rate surged past 9% and currently sits at 10%.  Of course, the 10% figure is a lie as well.  Previous administrations changed the way that the unemployment rate was measured in order to disguise how bad things really were.  This U-6 unemployment figure is still reported by the government, however, the government now uses U-3 as the official unemployment number.  While U-3 unemployment is 10%, U-6 unemployment is 17.3%.  This figure was 13.5% one year ago.  Simply put, things are bad.  But, government data collection is shady and should not be trusted as definitive.  Shadow Government Statistics, a private data collection/analysis website places unemployment at over 22%!

Ben Bernanke failed to see the impending collapse even shortly before the economy tanked.  While a candidate for President, Mr. Obama repeatedly criticized the economic policies of the Bush Administration.  By choosing to reappoint Ben Bernanke as Chairman of the Federal Reserve, President Obama was giving his tacit approval to the policies of the Bush Administration.

The administration has also increased the national debt to dangerous levels.  The US is now in serious risk of having its credit rating downgraded.  Any hopes of an economic recovery would be shattered if this were to happen.

Foreign Policy:

Candidate Obama repeatedly attacked the Bush Administration on three fronts: the economy, the wars, and foreign relations.  President Obama has failed to correct the errors of the Bush Administration on any of these areas.  As mentioned above, President Obama has continued the “stimulus” and bailout policies initiated by President Bush.  His reappointment of President Bush’s Federal Reserve Chairman Ben Bernanke confirms the fact that President Obama’s economic policies are not notably different than those of President Bush.

The second area where candidate Obama frequently attacked the Bush Administration was his handling of the wars in Iraq and Afghanistan.  Mr. Obama criticized President Bush’s Iraqi surge, falsely claiming that it was not a success.  If I were a candidate who ran on a platform of change and who repeatedly criticized the previous administration’s military policies, I surely would not have allowed the previous President’s Defense Secretary to continue serving.  Furthermore, if I had attacked the former President’s Iraqi surge strategy, I would not have employed a similar strategy in Afghanistan.  However, President Obama has done both of these things.  He kept Defense Secretary Robert Gates in his position, and he has sent an additional 68,000 troops to Afghanistan since taking office (many of those troops were sent in the weeks following the President’s claiming of the Nobel Peace Prize).

Candidate Obama promised to have all of the combat troops out of Iraq within 18 months after taking office.  That leaves him less than six months to remove over 100 thousand troops from Iraq.  Id put the chances of this happening right at zero.  More likely, President Obama will declare that the troops in Iraq are no longer combat troops (despite the fact that they will almost surely be engaging in combat).

President Obama missed a historic opportunity to improve relations with Cuba.  Since taking over, Raul Castro has introduced many positive reforms, introducing notions of private property, increasing wages for productive workers, and allowing Cubans to take advantage of certain technologies.  Raul Castro’s Cuba still has a very long way to go, but any movement in the right direction should be seen as positive.  Candidate Obama pledged to improve relations with Cuba.  Instead, President Obama has continued to support the same policies towards Cuba which have failed for the past 48 years.  Of course, this si just one example of this administration’s failed foreign policy.

Candidate Obama pledged to repair our strained relations with foreign nations.  President Obama has failed at this as well.  He has been publicly scolded by Russia’s Putin, Israel’s Netanyahu, France’s Sarkozy, and other allies.  In fact, I would argue that our foreign relations have not noticably improved with a single foreign nation since President Obama’s inauguration.

Agenda:

President Obama has almost completely failed in his efforts to push his agenda during his first year.

Remember, this President was the candidate who vigorously campaigned on a platform of “change.”  There have been few noticeable changes in the previous year.

With sizable majorities in Congress and a public eager for change, President Obama should have had a relatively easy time pushing through at least some major parts of his agenda.  The only major bill that President Obama was able to push through Congress during his first year in office was the “stimulus bill.”  This was a bill which was passed by using intimidation, threats, fuzzy math, erroneous estimates, and down right lies.  The “stimulus” bill was a costly mistake that did little if anything to stimulate the economy but will cost taxpayers around $1 trillion when the time comes to repay the costs of financing this bill.

Congressional Democrats pushed various health care reform bills for well over 6 months.  During this time, President Obama showed almost zero leadership on this issue, basically promising to sign any bill that came out of Congress.

Had President Obama taken a leadership role and urged Congress to pass a series of smaller health care reforms instead of trying to push a sweeping bill down the throats of an adamantly opposed American public, he could have signed several of these reforms months ago and moved onto other pressing issues.  Instead, Democrats wasted the better part of a year, alienated a large portion of American voters, and came up empty handed.  Democrats might now adopt the strategy of pushing through smaller, incremental reforms, although it could even be too late for that approach.

Opponents of government controlled health care can thank President Obama’s complete lack of management abilities for preventing the nationalization of health care that seemed to be a foregone conclusion several months ago.

The President’s inability to lead has also prevented the passing of cap and trade and several other government intrusions into the lives of individuals.  He has placed his coalition in danger time after time, and now seriously risks losing the House of Representatives in November.  Things also look increasingly likely that the Senate may be in play in November as well.  More ont his in a future article, but it is beginning to look very likely that Democrats will lose President Obama’s former Senate seat, Vice President Biden’s former Senate seat, Harry Reid’s Seat, and possibly Hillary Clinton’s seat.  This would have been unthinkable only one year ago, but then again so would a Republican winning Ted Kennedy’s former Senate seat.  President Obama has alienated Democratic voters to a degree that even the most optimistic Republican would have thought to be impossible a year ago.

President Obama should follow the lead of Domino’s Pizza: soak in and address the valid criticisms, revamp his “product,” and use his rhetorical skills to sell his new image to the public.  Failure to do so can only lead to a changing of the guard in the 2012 Presidential election.

Americanly Yours,

Phred Barnet

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The government passed laws like the Community Reinvestment Act which essentially mandated banks to loan to people who would not have been able to obtain loans otherwise.  Then, the government and the Federal Reserve created money out of thin air and lent it to banks at absurdly low rates.  Flush with new and cheap money, these banks massively increased their lending to “sub-prime” borrowers (begin bubble).  With the money supply growing at unprecedented rates in the 1990′s and this decade, there was always enough money for banks to make loans.  Borrowers were able to take out second mortgages at very low rates.  Home builders rapidly built houses to meet soaring (bubble-induced) demand.

As with all bubbles, this one burst, leaving home builders unable to sell newly built houses and borrowers unable to meet their obligations.  Banks had sold off the rights to their lender’s payments so they would have more money to make new loans.  This left the banks in the same boat as homeowners who could not make their payments.  But, while homeowners and home builders had to file for bankruptcy and sell off their assets to pay their debts, the banks used their lobbyists, fear, and their ownership of the Federal Reserve to convince our government to bal them out.

The government and the Federal Reserve then printed up a bunch of money–they simply created it out of thin air–and gave it to the banks in exchange for ownership.

This happened on October 3rd, 2008.  I can understand the government’s perverse rationale that led it to bail out these banks.  What I can not understand is why, over a year later, the government continues to own large stakes in these banks.

The government has now taken to regulating the salaries of banking officials, as well as the actions and practices of these banks.

So, it comes as no surprise to the observant that the government would use its power and control to create perverse incentives.

Bank of America and Citigroup–two firms now under the ownership of the federal government have begun implementing new fees.  These fees are not on late payments, gong over one’s credit limit, or cash advances.  Instead, these government owned banks have announced fees for customers who regularly pay off their balances.  Customers who leave monthly balances on their cards will not be charged the fees.

A fee is similar to a tax (especially if t is levied by a government owned entity).  Both taxes and fees use pricing to create incentives to change behavior.

Because Bank of America and Citigroup are owned by the government, a fee on those who pay off their balances regularly can be viewed as a tax on them.  Because those who leave monthly balances on their cards are exempt from these fees, this can be viewed as a subsidy for those who leave balances.

Our government is creating perverse and dangerous incentives: they are incentivizing debt and discouraging good and proper financial habits.

But, you cant hardly be surprised by this.  After all:  our perverse government’s perverse actions do tend to lead to perverse incentives.

Americanly Yours,

Phred Barnet

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The problem here is that there is a very good and simple reason why there is not going to be an increase in Social Security payments: prices have dropped by 2.1% since the fall of 2008, meaning that the money that seniors already get from Social Security actually buys more goods and services than it did last year.  On top of this, the Social Security Administration has already given seniors a large increase in their payments this year: in January, seniors received a 5.8% boost in their payments, the largest increase since 1982.

Once again, President Obama is using misguided “logic” to support his own political goals.  Social Security payments are indexed to price inflation, however, they are not allowed to be decreased, meaning that a decrease in prices actually makes seniors much better off.

I understand that many seniors are suffering in this recession.  Many have lost a great deal of their savings due to the collapse in stock prices.  However, Congress decided over three decades ago that Social Security payments would be linked to the cost of living.  Besides the obvious reason of guaranteeing seniors a livable income, Congress likely had another reason for guaranteeing the benefits: they wanted to take the decision out of the hands of the political process.  Right or wrong, it will be very difficult for members of Congress to vote against the $250 payment for seniors.  For one, seniors are a vulnerable group, many of whom are living only on their fixed Social Security payments.  Seniors also vote–a lot.  As a group, they historically have the highest rates of voter turnout.

I firmly believe that this bill should be voted down.  For one, President Obama’s proposal to send checks to seniors  is addressing a problem that doesnt actually exist: seniors can buy more for their money than they could a year ago.  Additionally, these payments will cost roughly $13,000,000,000 [$13 billion] in money that the government does not have.  The money being spent on this non-existent problem will have to be expropriated from hard working citizens or printed out of thin air (devaluing the savings and earnings of anyone who does not receive a payment).

This “something must be done” mentality is flat out wrong.  Many supporters of the bailouts, stimulus, and other interventionist policies defend them not on moral or economic grounds, but rather defend them by saying that “at least they are trying something.”  This mentality has brought this once great Nation to the brink of bankruptcy and has brought government regulation into nearly every single aspect of daily life.  We can only hope that enough members of Congress will do the right thing and oppose these payments.

Americanly Yours,

Phred Barnet

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In case you didnt notice, I put up an entire section devoted to this bill.  You can find it right under the Americanly Yours logo, or by clicking here.

If you use Facebook or GMail, please consider adopting the following messages as your “status” daily.  Even if you are not willing to make these messages your status, please consider calling the Senators.  This is very important!

Status for Monday, October 12:

S. 604 (The Audit the FED Bill) Now has the support of 31 Senators! Victory is within reach. Lets target 1 Democrat and 1 Republican today and bombard them with calls to get their support. Democrat: Mary Landrieu (LA) (202) 224-5824. Republican: Michael Enzi (WY) (202) 224-3424. It literally takes less than 2 minutes to call! PLEASE REPOST!!!

Status for Tuesday, October 13:

S. 604 (The Audit the FED Bill) Now has the support of 31 Senators! Victory is within reach. Lets target 1 Democrat and 1 Republican today and bombard them with calls to get their support. Democrat: Kristen Gillibrand (NY) (202) 224-4451. Republican: George LeMieux (FL) (202) 224-3041. It literally takes less than 2 minutes to call! PLEASE REPOST!!!

Status for Wednesday, October 14:

S. 604 (The Audit the FED Bill) Now has the support of 31 Senators! Victory is within reach. Lets target 1 Democrat and 1 Republican today and bombard them with calls to get their support. Democrat: Tim Johnson (SD) (202) 224-5842. Republican: Richard Lugar (IN) (202) 224-4814. It literally takes less than 2 minutes to call! PLEASE REPOST!!!

Status for Thursday, October 15:

S. 604 (The Audit the FED Bill) Now has the support of 31 Senators! Victory is within reach. Lets target 1 Democrat and 1 Republican today and bombard them with calls to get their support. Democrat: Tom Udall (NM) (202) 224-6621. Republican: Olympia Snowe (ME) (202) 224-5344 . It literally takes less than 2 minutes to call! PLEASE REPOST!!!

Status for Friday, October 16:

S. 604 (The Audit the FED Bill) Now has the support of 31 Senators! Victory is within reach. Lets target 1 Democrat and 1 Republican today and bombard them with calls to get their support. Democrat: Jay Rockefeller (WV) (202) 224-6472 . Republican: Susan Collins (ME) (202) 224-2523. It literally takes less than 2 minutes to call! PLEASE REPOST!!!

Americanly Yours,

Phred Barnet

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