July 07, 2011

Mr. Paul's Helpful Suggestion

I am intrigued and bemused by Congressional gadfly Ron Paul's idea that the current debt ceiling crisis can be handled expeditiously and non-legislatively by a simple act of the Federal Reserve, namely, its destruction of the $1.6 trillion in U.S. Government Treasuries currently on the Fed's balance sheet. In reality, of course, no material "destruction" or shredding is actually necessary; Ben Bernanke merely has to bring up the Fed's balance sheet on his corner computer, click on "Treasuries held," hit "select all," followed by "delete." And instantaneously, the United States will be $1.6 trillion richer, the national debt will drop from $14.3 trillion to $12.7 trillion, and we're good to run expenses through the roof probably for a couple of years more.

Certain liberal Keynesians, such as Dean Baker, think it's a good idea, on the surface of things, although smelling the rat underneath. Mr. Baker even points out that an additional bonus will accrue, specifically that the United States Treasury will be immediately relieved of any obligation to pay interest on the Fed's holdings, although this good news is somewhat offset by the balancing loss of "income" to the Treasury, since the Fed "pays" back to the Treasury the interest which the Treasury "pays" to the Fed, currently about $80 billion per year. I am not making that up.

Mr. Paul, who believes in a gold standard, obviously hopes that Americans in general get the joke. His proposal, in fact, would work, and while monetary theorists will raise various abstruse and arcane arguments about damage to the monetary base, and blah blah blah, these objections are all horseshit, for the simple, sufficient reason that the entire fiat money system is itself horseshit, and any system which lacks a corporeal reality and is entirely made up (I'm thinking about religious apologetics here, in fact), can always invent a new and factitious "explanation" or compensating artifact to take care of such a technical problem. We can say that the space where the Treasuries used to be on the Fed's balance sheet is now occupied by "Dark Matter." There, fixed it for ya.

The logical, symmetrical elegance of Mr. Pauls' suggestion is simply sublime. For what did the Fed pay for the Treasuries on its balance sheet? Nothing. It "bought" them with nothing. It conjured the money out of thin air, by taking them off the hands of compliant Primary Dealers who held the Treasuries for the shortest time possible and then dumped them on the Fed, and such PDs were "paid" when the Fed made an accounting entry (a few billion here, a few billion there) on the "reserve accounts" of its co-conspirator banks.

Now it is true that the Fed's Treasuries, if sold on a secondary market by the Fed to genuine third parties, would raise actual hard cash. Yet a couple of problems arise here. First, the Fed's participation in this ridiculous game of "purchasing" Treasuries in its "quantitative easing" programs has resulted in absurdly low interest payments (coupon rates) on the T-bonds the Fed holds, and it's difficult to see why there would be much of a market for this trash if the economy improved to the point where the Fed would be motivated to unload them in an effort to control inflation (this is the "sophisticated" financial argument). Second, however, is the whole idea of unjust enrichment - the Fed paid nothing for these Treasury "securities." Why should it make billions on their "resale?"

These are details a little removed from Ron Paul's wry joke at the Fed's expense. What he is really highlighting, in a pretty brilliant way, is that the entire money system has no reality anymore, that the actions of central banks the world over to "pump up liquidity" by making computer entries in their own balance sheets have created a farcical, and easily manipulable, system of measuring "wealth," and that the net effect of all this money creation has been simply to bestow long trains of 1's and 0's on the balance sheets of big banks with close connections to the fonts of money, the central banks of the world, and particularly the Federal Reserve Bank.

So hit "del," Mr. Bernanke. You won't lose anything. With the decks cleared, you can start tomorrow reacquiring everything you just erased, using the same consideration: nothing but the thin air in your office. And when we hit the debt ceiling again, well, the solution is obvious, and no doubt Mr. Paul will point the way once more.

July 04, 2011

When in the course of human events

I note with satisfaction that Governor Rick Perry of Texas has recently made the rounds in California, shakin' hands, back-slappin', grinnin', and no doubt testin' the waters for a possible GOP primary run at the Presidency. He met with professional fund raisers and party bigwigs. This is gratifying indeed. In part my satisfaction has to do with a sentimental attachment to Governor Rick's lengthy citation, some years back, of a Waldenswimmer post in which I defended Perry from scurrilous, smarmy attacks from Keith Olbermann concerning Perry's statements about secession from the union by Texas. Since I favor Texas's departure from the United States on any terms whatsoever, I was quick to point out that Rick had it just about right, that Texas (along with other populous states such as California and New York) actually has a negative ROI (return on investment) when measured in terms of transfer payments received from the federal government versus taxes paid in. Olbermann, who had not done his homework, implied that Texas was little more than a ward of Washington, D.C., and this was way, way off.

Indeed, there has been a lot of talk, and some action, over the last decade or so not only about secession but so-called "Tenth Amendment Resolutions" in the several states, Texas prominent among them. The Tenth Amendment, part of the original Bill of Rights, provides:

"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."

The Tenth was ratified in 1791 and has been part of the Charter from the beginning, although sometimes you wouldn't know it. I was reflecting on this situation recently as the patriotic sap rose in my American veins, as it often does around July 4. I would venture to say that the Declaration of Independence is the single greatest political manifesto ever written by human beings, and it's interesting that its chief drafter, Thomas Jefferson, is also credited with saying that "that government is best which governs least," and that if he had to choose between "newspapers without government, or government without newspapers," he would gladly choose the former over the latter. Which is to say, Jefferson was very suspicious of centralized power, and it's not hard to imagine that he would be horrified by the bloated, overfed monster his little democratic baby had become over the 235 years since his magnificent document was read out.

The only kind of "revolution" I can imagine in our day and age is a soft devolution in which the centralized form of American governance gives way to a return to the original federalist scheme idealized in the Tenth Amendment. The main opposition to such a movement, paradoxically enough, would probably come from liberals, because the ideas behind "states' rights" always seem to conjure up memories of George Wallace and Lester Maddox, recalcitrant Southerners who wanted to perpetuate segregation and Jim Crow laws under the guise of state "independence." This is what gave "states' rights" a bad name and, conversely, made liberalism and big Washington government seem virtuous. Unconsciously, us here liberal folk probably all carry this bias around within us.

Big centralized governments, however, also deliver other things, such as 1984, Stalinist bureaucracies, the Third Reich, central planning of economies (viz., the Federal Reserve), militarized foreign policies, National Surveillance States, spying on one's own citizens, illegal searches and seizures by the government, breakdowns caused by overly-complex systems, massive wastes of money, and a vast sense of alienation of individual citizens from the workings of the government which controls their lives. We sometimes forget that the United States, as the third most populous country on Earth, is the only First World nation trying to pull off a functioning democracy under conditions of such size and complexity.

I was talking about such things the other day in the context of the Social Security funding crisis. As the 78 million Baby Boomers keep retiring, or trying to, this problem is simply going to get worse and worse. Medicare funding problems are already in a state of profound breakdown. It's weird, however, to hear any member of Congress complain about the high cost of Social Security, because as I've said on other occasions, the best way to conceive of the "Social Security Trust Fund" is as a crime scene. In order to continue funding military adventures the world over, and to over-capitalize the armed forces, Congress has since the early 1980's looted the excess payments into Social Security to the tune of $2.5 trillion, replacing real tax revenues with a pile of worthless IOU's payable by an insolvent central government, one that is so far underwater that it now runs a "budget" based on 42% borrowed money. If such criminality occurred at the local level, say in the legislature of New Jersey, for example, one can imagine that the legislators responsible would be rewarded with something other than reelection. All of these thieving solons would be treated as the frauds and embezzlers they actually are, representatives who stole money which they knew, to an immoral certainty, could not possibly be paid back.

American Representatives and Senators get away with such thievery (and escape with their lives) simply because there is no personal responsibility attached to being a member of such an amorphous, mutating, undefined, unresponsive body as the modern American Congress. If I, a California voter, complain about the embezzlement of Social Security money, how do I redress it? Isn't it true that the blame can be equally laid on representatives from Ohio, Utah, and Oklahoma, people I never had a chance to vote against because of the federal system?

You can multiply examples of this taxation without representation and powerlessness to change the policies by which your life is governed. It's built into the system of overly-centralized government, which never, in recorded history, has worked very well for very long. If you take the five states which supply the federal government with 40% of its revenue (California, Texas, New York, Illinois and Florida), you can imagine that if these states (all with a negative ROI on federal taxes paid) were simply allowed to retain such taxes (FICA and income), that each could devise a much better system of retirement security and health care than the federal government can provide using a one-size-fits-all approach. Indeed, if there were 50 such separate systems, one would imagine that out of that very diversity that far better ideas would emerge about how to provide pensions and health care to aging citizens.

Anyway, these are huge subjects. We obviously need a new Constitutional Convention to rework all the things that aren't working, and to return the lion's share of power to the local level, where the citizenry can control and keep an eye on it. We can repeal the 16th Amendment (income tax by the federal government) while we're at it, since the present system, in which the top 10% of all income earners pay substantially more than half of all income taxes, has simply gotten stupid beyond words. Hey, Grover Norquist, if you want to starve the beast, then starve the frickin' beast and get serious about it. Let's leave the federal government with enough money to "provide for the common defense," as the Constitution says, but not to start wars every other week on a President's whim. Let diversity and experimentation from state to state reign free. We have many states with populations larger than European countries, and the European stats seem to thrive on their compact and manageable size (they seemed to get into trouble when they began emulating the United States with its ideas of "union" and centralized banking. Don't copy us, folks; we have no idea what we're doing).

The federal government can run the bankruptcy courts, patrol the maritime coasts, secure the borders and deal with immigration (for the first time, perhaps?), and defend the country as a whole against attack, just like the Constitution says. For everything else, it can get the hell out of the way, and stop, as Tom said, its long train of abuses and usurpations...