Who’s Going To Eat The Losses?

Small mostly self-sufficient family-owned farms provided labour for developing and upcoming industry. Small farmers and family were drawn to industrial centres (push away from poor difficult life working the land to more convenient and financially interesting way of living). Fossil fuels, artificial fertilisers, chemicals and monoculture approaches made it possible for limited workforce to work large swaths of land and produce large amounts of outputs. Farms became larger and larger. I assume that land, machines and renewables were mostly bought with credit. A mechanism that seems to have had a very destructive impact on so many fronts (social, cultural, environmental, resilience, …), and when the system falls the banks will own the land.
Am I seeing things too simple? Honest question…
It seems that what looked like a swell idea may in the end not be that fantastic after all.
Inertia and lock-in is a real pain…

By the end of this century the World will have burnt all its fossil fuel reserves. A baby born today will potentially see that happen in their lifetime; the bottleneck generation. Hence, if it is not already too late, don’t have children.
ps. Bottleneck was coined by Catton in his book by the same name. A period in human history where rising population size collides with a falling carrying capacity. A greater volume trying to fit through a smaller aperture - a bottleneck.
pps. The antidote to debt is inflation. Inflation will evaporate debt away but make our current industrial civilization unaffordable. Our energy descent will make inflation a certainty. Prepare for it.

Am I seeing things too simple? Honest question...
I don't think so. Your statements are accurate. You focused on farms. The workforce that left the land is now working in factories, or in offices, or on the roads, etc... We can make similar statements for other segments of the society. Subtleties and difficulties comes when we try to explain the workings of the whole system. A lot has changed since the old time. Before, the land was kept within the family, usually given to the older son who was responsible to take care of the elder. Parents ended their lives in the farm. This is not true anymore. When parents wants to retire, they sell the farm to the child/children who cannot afford to buy it. A basic farm in Quebec is worth 2-3M$ on the market. And adding the more stringent regulations we have today, fewer people wants to take a farm. One more vicious fact: it is difficult to divide farmable land. So, it is difficult to create smaller farms. The whole system looks like it has been patiently tuned to advantage the agro-industrial behemoths or the ones with deep pockets. The same is happening with many fresh water sources. CocaCola, PepsiCo, Nestlé, el Al. are buying them. People are agitating the red flag, asking our government to declare fresh water as a strategic asset for the country. Nope! Free trade rules have precedence over national interest and no politician have the guts to rise against these anomalies. As many said, brace for yourself and your loved ones, help some if you can, and try to lose the minimum of feathers across the coming storm. Good luck to us.

My soon-to-be brother-in-law has recently been reading The New Confessions of an Economic Hitman by John Perkins. It appears several chapters have been added to the original book. In any case, it allowed us to have a conversation about debt and, in particular, how it is often used as a tool of enslavement. The more I think about it the more coming off of the gold standard has penalised citizens and rewarded governments (and all those who feast upon). One of the ‘hazards’ of debt is the breakdown of social cohesion which is what we’re witnessing now (America has the alt right vs social marxism paradigm, Britain has its pro EU vs anti EU split and Europe itself has the ‘Greek problem’). From what I’ve read about the subject, debt makes a few people rich and the rest become poor. It’s such a pervasive instrument and so naturally we cannot have public conversations about it.
I suppose the greatest example of positive reform following debt enslavement was Solon’s Athenian Democracy. What we get this time is anyone’s guess. I get the feeling that the following statement applies;
“If you are reading this then you are the resistance.”

Mark_BC wrote:
How absurd is it that we actually believe that caring for an additional 25% of old people is going to bring down the economy. Take a step back everyone and think about it from 10,000 feet up, look at the big picture. Don’t get hung up on $$$ charts because as we all know, $$$’s will soon go bye-bye and even today they have no relation to anything real. The bottom line is this: if technological automation and people getting old are enough to destroy the economy, then the problem lies elsewhere, structurally, with the wealth “distribution” system.
We see things quite differently. I'm not sure how the world functions in your view. To me, people do things for selfish reasons. (Even when I donate blood, it makes me feel good.) I work either because I just love it so much ... or the money I get from my work allows me to purchase items that I want/need. Just because I love my work soooo much, doesn't mean that I can do it for free without dire financial consequences. Would you continue to work if you weren't getting paid? Likely not! How would you afford to live? So, money does have some realistic basis in modern life. Frankly, the profit motive is what powers the economy. Profit is what is left over when all expenses of producing something have been deducted from the price received. Taxes are an expense that reduces the leftover profit. It isn't just income taxes to consider. There are all manners of taxes - property, vehicle, sales, etc. There is also the cost of complying with government regulations that reduces profit. With enough taxes, there isn't any profit remaining to power the business. As taxes go up, the odds increase that profit will decline. When people retire, they mostly switch hats from being on the production end (producing a saleable product) to just being on the consumption end. Other than high net worth individuals, most retirees pay less in taxes once retired. But, government has obligations that need to be funded. Someone(s) have to make up the shortfall in taxes due to folks retiring. Since you're Canadian, you may not know how the US Social Security and Medicare system works. People and their employers each contribute a percentage of wages up to a limiting value to the Trust Funds. The Trust Funds then pay out benefits to current recipients from the specific Trust Fund and theoretically manages the balance. In essence, it is a Ponzi scheme. Many folks have built their retirement plans around the Social Security promise. Since these folks (and their employers) were taxed throughout their working life, folks feel entitled to receive benefits as promised. Unfortunately, President LBJohnson introduced a new budgeting gimmick called the Unified Budget in the 1960s. By doing so, all the various Trust Funds were in effect commingled with all the other funds in the federal budget. It didn't take long for congress to figure out that these funds were oceans of slush funds for their special projects. Who could have guessed that congress would abuse this? Well, they abused it. Here is the most recent US government debt to the penny. The Intragovernmental Holdings is a sum of all Trust Funds. Bet you can't guess how much of that $5.4+ trillion hasn't been spent (here's a hint, the end of day balance is $0.00) That's right. Every day, all of the excess from these funds get transferred out of the funds. As my second chart in post #9 shows, the excess in the 2 major accounts have come to an end.
Current Debt Held by the Public Intragovernmental Holdings Total Public Debt Outstanding
09/07/2017 14,410,076,163,680.58 5,434,510,797,926.54 19,844,586,961,607.12
Social Security is affectionately known as the third rail of US politics - touch it and you're dead. As the chart shows, expenses are set to accelerate henceforth. As a result, each year, politicians will have to hunt for additional taxes, cut benefits, borrow money (raise future taxes surreptitiously,) or do something creative to get out of this quagmire. They'll try nibbling on the edges - slight increases in future payroll deduction tax percentages, limiting social security payments to the 1%, changing it to a "needs" based system (welfare,) etc. It might work for a while, but there's no way for it work long term. Believe it or not, it is just simple mathematics. You have much more faith in government than I do. Just like profit motive drives the economy, money/power drives politics. Politics is expensive. It costs $millions to run for congress. Congress critters are always raising funds for their next campaign. Fortunately (for them,) high value individuals are exceedingly generous, fund candidates who can win, and then expect some sort of payout - loophole, reduced regulation, tax cut, etc. from the politician being funded. Ever wonder why pharmaceuticals are so expensive in the US? It is this unholy alliance that drives costs. Is there any high profile industry that doesn't have cozy relationships. I can come up with hundreds of examples of these "screw the plebs" legislation. So, the bottom line for me is that US government financial failure is baked in the cake. (Some other event may take us out first.) Knowing the exact timing of the event is hard to determine at this point. By the mid 2020s, all taxes received will be earmarked for these transfer programs. There won't be any money left for defense, climate change, transportation, or any of the other Departments we might consider important. Congress can't raise taxes considerably enough, and they can't cut benefits enough. Will they be able to borrow enough? At what point does the debt level cause confidence to fail in the system? Where would you want to be when the entire system grinds to a halt? Do you want to be in a location where resources are exceedingly limited and due to diminish rapidly from competition with your neighbors (who you hardly know) ... or do you want to be in a location where there are enough sustainable resources for the local community - a place where cooperation has a chance? That was really the gist of my last post. Grover

Everyone seems interested in defending their generation. Who cares what direct or indirect excuse you have for your generation? No one cares about excuses. History should be the teacher, and here we are again.
All I know is I’m not paying for another generation that stood down and became the generation they supposedly stood against when they were younger just to become the same people they protested.
Knowing what this inept government and banking system will do to keep the Titanic band playing I was sure to get my family out of the system and the country. Any other person wanting to survive the onslaught should get out too. Choose to not participate. Be smart. Be brave. Become self sufficient. Be flexible. Resist.
Depend on that retirement tied to the stock market, pension, S.S., medicaid, welfare. Your lost, but the best of luck to you.

Money and debt are one and the same thing. Money is created as debt. However once created, money gravitates to the top and hence debts become un-repayable at the bottom. Inequality increases until the system gets a forced reset and the cycle can begin again. .The financial system can prolong this reset by controlled inflation and perpetually growing the debt base. Unfortunately we live on a finite World.

I’d open with this, which one is it?

climber99 wrote:
However once created, money gravitates to the top and hence debts become un-repayable at the bottom. Inequality increases until the system gets a forced reset and the cycle can begin again.
or
climber99 wrote:
The financial system can prolong this reset by controlled inflation and perpetually growing the debt base. Unfortunately we live on a finite World.
Are we in a linear progression of debt until finite limits become apparent or do we experience cyclical resets? I'd argue the latter given how debt bubbles have popped in the past, even before the oil age began... Mississippi Bubble, anyone? Is money always debt? Or does it become debt after the elites decide the economy isn't expanding quick enough? Or do the potential benefits of products yet to make it to market (e.g. medicines) necessitate debt? It might be worth giving debt the same treatment as a prescription drug, i.e. a list of both what it aims to cure plus it's side effects. Pros: - Everyone gets paid - Consumer can access products earlier - Governments can provide additional services - People feel prosperous (for a time) Side Effects: - Inequality increases - Servitude increases - Marriage breakdown increases - Suicide increases - Social cohesion fragments - The youth become impoverished - Political instability rises - Responsible behaviour is punished - Scapegoats are presented - Conflict begins And on that cheery note, I bid you goodnight! Cheers, Luke

Money is grouped into a number of (increasing) categories.

  • Cash [FRED: CURRCIR] - actual FRNs, in circulation or in the vaults of banks 1.57T
  • Cash + Bank Deposits @ Fed: [FRED: BASE] 3.9T
  • Total Reserve Bank Credit [FRED: WRESCRT] 4.4T
  • Total Bank Credit [FRED: TOTBKCR] 12.2T
So when a bank makes a loan, and creates money, it appears in TOTBKCR. When the Fed prints money and buys a Treasury bond, it appears in WRESCRT (and also BASE). When someone converts bank credit into cash, the Fed prints an FRN and swaps out a Bank Deposit @ Fed [CURRCIR increases]. Most money is bank credit [TOTBKCR]. Some money is cash. [CURRCIR] Roughly speaking, money only has value if it is scarce. If the rules say that banks can create money, but it must have an interest rate attached, then people only "create money" (by borrowing it) if they are willing to pay interest on it. This system assures - theoretically - that money is only created when it is really needed. Once that money is no longer needed, the loan is repaid, and the money vanishes. The attached interest rate makes sure of this. Everyone is incentivized to reduce their outstanding debt money by virtue of the attached interest payment. If we imagine a system where money is no longer created through borrowing, then we have one big problem to solve: how much money must there be in circulation? What's the "right" amount? And who decides? And how do you destroy money that is no longer needed? (i.e. once inflation starts to become a problem). I'll start out by proposing a "Public Money System" - only the government can create money (either bank credit, or cash). It does this by spending money into the system. Government also still imposes taxes, and this is how it can also remove money from the system. Under this system, banks could no longer create bank credit. The only entity able to create both "bank credit" AND cash would be the central government. Banks could lend, but only from deposits on hand. Deficits aren't borrowed, they're printed. Surpluses result in money vanishing - its the only way to vanish money, in fact. In a growing economy which needs more money to function, government will print to construct surplus money. Deficits or surpluses are set by an annual popular referendum. "The people" get to decide how much money to create, or destroy. Politicians then figure out which programs to fund once the overall budget parameters are voted on. Would this be better, or worse, than private bank credit creation by commercial banks? Its an interesting question. Certainly I like the concept of an annual referendum (since I don't trust politicians - or banks), but I do think that things would go in cycles. National character would make an appearance. Frugal Germans would always vote to pull money out of circulation, while the more expansive US would probably always vote to increase it - at least until inflation got out of control. Would the people end up doing the right thing? I suspect they would, at least over time. Over the course of a cycle or two, they'd have the opportunity to learn where inflation comes from. And higher import prices - from a falling currency. The state would have an incentive to teach them about it, certainly - as opposed to now, where its a big secret I don't think there needs to be a gold standard; after all, the thing that backs the currency is enforced scarcity alongside what you can buy with it. Currency is a commons, and it makes sense for "the people" to control the commons. Even if they end up doing the wrong thing, they will have the ability to learn from their mistakes, and then fix it on their own. In some sense, "the people" could hardly do worse than the private bankers have done.

Interesting thoughts and great background Dave. Here’s where I zero in:

I don't think there needs to be a gold standard; after all, the thing that backs the currency is enforced scarcity alongside what you can buy with it. Currency is a commons, and it makes sense for "the people" to control the commons. Even if they end up doing the wrong thing, they will have the ability to learn from their mistakes, and then fix it on their own.
And:
Deficits or surpluses are set by an annual popular referendum. "The people" get to decide how much money to create, or destroy. Politicians then figure out which programs to fund once the overall budget parameters are voted on.
That's a fascinating concept. Let "we the people" decide annually how much money to create. We'd have no one to blame but ourselves for income/wealth inequality. Can you imagine the frantic campaigning and subtle brainwashing that would go on every year right before the vote, as various factions struggle for votes? Then I try to imagine on whose side CNN, The NY Times, The Washington Post, ABC, CBS, FOX, etc. would be on? I'd bet a vital body part they'd be on whichever side the Goldman Sachs and JP Morgan were on and I have trouble imagining they couldn't convince the majority of "we the people" to vote in the interests of the big banks (who would be in cahoots with the federal government to buy enough votes with handouts to prevail in the annual vote) even if that was ultimately NOT in their own best interests. Whether we need a gold standard or not, let me ask you (and others) if you think a fiat money system could survive on its own merits if it wasn't enforced by the government at the barrel of a gun. I don't think our current fiat money system would survive very long if the government didn't force it on us through legal tender laws and whatnot. So, if a fiat, debt-based money system is so good for us, why can't it survive without the threat of prison and violence? I say we knock out the legal monopoly of our debt-based money system and let it fend for itself in a free marketplace where various forms of money exist and compete with each other. If there is anything inherently valuable in a debt-based money system, I guess ours would have to evolve to survive (if it could survive at all). Who knows, maybe it would survive in some form. I also don't think we need a gold standard in the sense I think you mean it (fiat currency being exchangable for gold/silver at a government-set rate). I am VERY MUCH in favor of doing away with fiat's monopoly and allowing all debts and taxes to be payable in anything the people accept at whatever exchange rate the market decides. (Of course, government just like any other economic actor, could demand that it be paid in any form it decides. But in a wide open monetary system, I could easily meet the government's requirement by exchanging what I've accumulated for what the government wants to be paid in.) That means FREEGOLD primarily, though silver and cryptocurrencies would also be in the mix. I could pay my taxes and buy goods and services in fiat currency, or in gold, silver or cryptocurrency at whatever the free market set as the exchange rate on the day I paid them. If excesses developed in any of the widely used forms of money, the people would adjust by moving in and out of the various forms, providing a natural set of checks and balances. Print too much currency? Ok, I'll exchange mine for silver or gold. I want to expand my business but I don't have enough gold or silver to finance it. Ok, I'll go to my bank, provide some gold/silver as collateral and take out a loan in newly created currency units, paying it back later with the currency, gold, silver and cryptocurrencies my expanded business brings in. https://www.youtube.com/watch?time_continue=154&v=74ynFnitLeo "Welcome to the Hunger Games. And may the odds be ever in your favor."

Tom-
Of course the cartels are going to campaign hard to get what they want. California has the referendum. There is all kinds of crap that happens each election season. And yet, if the people get a bee in their bonnet about something, a referendum gets passed regardless of what the cartel-controlled legislature wants.
You might consider where your argument leads. “We shouldn’t give people the vote, because they’re gonna vote stupidly. Instead, we’ll have a select group of Really Smart People who will make the hard choices that The People just can’t bring themselves to make…”
Here’s the secret. No matter what system we come up with, it can - and will be corrupted. “The gold standard” was supposed to keep things on the straight and narrow. But guess what? The gold standard got dropped, and nobody complained. “The People” were asleep at the switch.
We should start out by acknowledging that we cannot make things safe for all time. No system is better than the people that use it.
We can remove the power of the banks to create money. We can break them up, so they don’t control government. But we can’t force people self-govern intelligently. All we can really do is give people the lever to pull. We can’t force them to pull it, or even force them to keep it. Realistically, we need to face the fact that while we can probably create a system that will make things safe for a generation or two, but that’s about it.
I think its ok to have a national currency - a national unit of account. We should allow other currencies if people want to play with them, certainly, but a national currency is a good thing too. We have national parks, a national army, a national government - a national currency makes sense too. Facilitates trade between the states, trade with other nations, brings sanity to accounting. Can you imagine doing your taxes in some random local currency? Reading earnings reports denominated in a random local currency? Ugh. No thanks. National currency provides a great deal of efficiency that we’d regret losing.
I think what you’re really asking is to have a tax-free exchange between your alternate currencies and the national. You are really asking to buy and sell any currency you like and not have to pay taxes on it. (Currency = gold, or bitcoin, Euros, etc).
I say this because you can certainly buy and sell other currencies right now without any restriction. You can pay your taxes in gold if you like; sell your gold for USD, and pay pay pay to your hearts content.

I’m going to suggest sometime very radical to stop money accumulating at the top while un-repayable debt gets accumulated at the bottom. I warn you in advance, it ain’t going to be popular.

Outlaw wealth from being inherited through the generations.

Everyone would be born with equal wealth. Money is created through you own labor and spent by you alone. You either spend your savings into circulation before you die or lose it. The incentive to accumulate more than you can spend in your own lifetime would be removed. Inequality would be limited to your own abilities relative to others, not inherited and then amplified. Also more equal societies are happier and more sustainable, studies have found. (source: The Spirit Level by Wilkinson and Pickett)
ps. It would still be a Capitalistic system.

climber99 wrote:
Outlaw wealth from being inherited through the generations.
Climber - I applaud your courage to raise this idea. I've learned that the estate tax is a high-emotion topic for many people (both for and against). I've been chewing on a related idea for a long time now. Given your prod, perhaps I'll attempt to write a future article on it. Let me clearly state that I'm not advocating for this. I'm just entertaining the idea in my mind -- poking & prodding its pros and cons. Its gist is this: Our current system allows for big winners to create multi-generational wealth (think Rockefeller/Morgan, or more recently, Gates/Buffet/Zuckerberg -- even Trump). On top of the immediate advantage gained, those winners and their progeny then use that wealth to influence the system to their continued advantage (for example, bankrolling candidates who will tweak legislation/regulation/tax codes in their favor). This understandably feels pretty unfair to the bottom 99%. So the idea here is this. If you invent the next Google and make a gazillion dollars from it, good for you. Buy as much of the world and its pleasures as you can. You earned it. But your heirs didn't. So, you'll be able to leave your immediate descendants enough to live comfortably, but not unfairly so (in the spirit of the Warren Buffet quote: Leave your kids enough that they can afford to do anything, but not so much so that they can afford to do nothing. ) How much is that? 5 million per heir? More? Less? I don't know. But let's assume society can agree on a number. What happens to the rest of the gazillion? It goes POOF! Just to be clear: that doesn't mean it goes to the State as a massive estate tax receipt, where corruptible bureaucrats determine how it will be allocated. I mean it gets destroyed; it goes to money heaven. As in, the money supply just shrunk by a gazillion dollars. This has the combined effect of preventing unfair dynasties from being perpetuated AND marginally increasing the purchasing power for every dollar holder each time a mega estate is posthumously vaporized. OK -- I know there's a lot to attack in this idea. Some will hate the anti-libertarian concept of not having the freedom to do with (all of) your money as you please after death. An industry of complicated strategies for passing your wealth secretly to your heirs will surely arise immediately. Logistically, how would you handle liquidating the vast estates of the multi-billionaires? But the appeal of limiting dynasties while simultaneously re-investing in the purchasing power of our currency intrigues me. I'm sure there are better ways to do both than this idea, so folks, take our your sticks and whack at this piñata with improvements/alternatives worth considering. cheers, A PS -- yes, I realize that any marginal contribution to the purchasing power of our currency from this example would be very, very small compared to its continued loss of purchasing power due the accelerating debts/entitlement obligations backing the "full faith and credit" of the USD. To me, this is more about "fairness", as well as a "step in the right direction" monetarily.

Adam,
You are making the mistake that many make, thinking money is wealth. Well, really, it is. But only so far and no farther. Money is secondary, maybe tertiary wealth, is it not?
But the primary wealth is Google itself; and if it isn’t left to the progeny, that doesn’t mean that it doesn’t get inherited. It does, by those who think like the founder. And their ability to create wealth far exceeds the wealth already created.
So to carry out the idea, it isn’t enough just to send the wealth to money heaven. The Google company needs to be destroyed. All those connections, which are so effective in creating wealth, will have to be destroyed.
Genghis Khan could do it. He simply had all his family, and all his princes, come to his funeral. Then on the way home, they got ambushed by a crack troop, and killed. Then the crack troop was ambushed.
But that sounds way too civilized for my taste. I’m more of a country bumpkin, who might wish to leave my mobile home to my kids.

Michael_Rudmin wrote:
So to carry out the idea, it isn't enough just to send the wealth to money heaven. The Google company needs to be destroyed.
I'm not sure it does. Either the founder's shares get liquidated in a sale to the market upon his/her death (which likely depresses the stock price) or they get retired (which likely raises it). But I'm certain there are all sorts of repercussions I haven't thought through yet to either of those options that parties would angrily object to. I don't think I share your concern with "those who think like the founder" owning a stake in the Googles of the world (while alive, of course, in this example). As long as shares are fairly traded (which is a big assumption), every investor has the opportunity to own a stake if they so choose. I don't see a fundamental problem with that. Like I said, the spirit behind this concept has some appeal to me. But its practical application is likely too snarled with landmines to ever be successfully implemented.
Adam wrote: What happens to the rest of the gazillion? It goes POOF!

I like the idea… but, technically, how primary wealth go POOF? Easy for money, but not so for the 27 acres my wife and I own. Sold? To another rich? which will in turn perpetuate the system: not the same dynasty, but the same “thread”. Much like a company getting a new bunch of CxO.

As a practical matter, I came up with some objections.

  1. If Bill Gates dies, and the existing shares he owns go poof, that makes the remaining shareholders worth more - sometimes a LOT more. That provides a fantastic incentive to whack the founder, for any large shareholder. It might even become a “thing”. For partnerships, it makes the remaining partners into effective heirs. Most likely, it would make people less interested in creating businesses. Who wants to work 80 hours a week, only to become a target of an assassin. If Chris “dies suddenly”, Adam ends up owning Peak Prosperity. Best of luck, Chris!
  2. If Bill Gates dies, and then Microsoft goes poof, that provides a fantastic incentive to whack the founder - by any competitor he might have. It also more or less eliminates the incentive to invest in IPOs, since if that founder dies, so does your investment. That would end up killing the high tech goose-creating machine of Silicon Valley.
  3. How would you deal with a during-the-lifetime-transfer of either shares or cash from parent to child? Even if gifting remains a taxable event for the child, a determined parent can always gift property & cash over time. It feels as though this would simply create a huge market in loophole creation.
    Just off the top of my head, it feels as though it might just create more problems (via unintended consequences) than it would end up solving. Or maybe it would be a wash.

Am I missing something? Weren’t there all manner of panics and depressions when the US was on the gold standard? Not that a gold standard doesn’t have some merit. Thanks for any input.

Sorry to inform you, Michael, but Google can in no way can be described as being primary wealth. Land, water, energy and mineral resources are primary wealth.
Money is not wealth at all but a claim on wealth which might or might not be exchanged for it in the future.
Money has also a limited lifetime because it is born out of debt with a finite repayment date. The rich can only continue to hoard money and for debt holders lower down the pyramid to repay their debts because the debt base is constantly expanding. The debt base can constantly expand because our extraction of primary wealth is also constantly expanding…until it can’t!! It is pyramid scheme, pure and simple, that requires GDP to grow or it implodes. Well good luck with that, on a finite planet.
We had a blip in 2007/8 when the debt base contracted and our financial system almost collapsed.