2008 11 08 New-Practical-Laws

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The New Practical "Laws"-

of Global Economics

Why Taxes are the only tool remaining!by Martin A, Armstrong

former Chairman of Princeton Economics In.t'1, Ltd.

Copyright Nov. 26th, 2008

One of the h i g h l i g h t s of my e a rl y care er was M il to n Friedman attending one

of my le ct ur es . At f i r s t I was su rp ri se d tha t such a great mind would take the

tne t o cane l i s t e n to what l had t o say . I was n ot an academic. T was a gl ob al

a n a l y s t and f i x e r - u p p e r J But then I reansmbered t h a t back i n 1953, M il to n had

argued for a f l o a t i n g exchange r a t e system r a t h e r than a f i x e d exchange r a t e

system designed at Bretton Woods dur in g 1944. Mi lt on had seen the free market

f o r c e s adding the checks and balance t o keep governments i n l i n e . As our conver

s a t i o n progressed, I r e a l i z e d I was doing what Mi lt on had proposed and I was i n

the fr on t Lin es , ind eed , i n 1997, I t e s t i f i e d before the House Ways S Means

Committee on gl ob al ta xa ti on at the request o f then Chairman B i l l Archer- When

yo u t e s t i f y before Congress, they group you into ' panels w i t h l i k e persons. I was

placed on a panel with other economists who were pure academics. B i l l apologized

f o r the grouping because th er e was j u s t no one qu it e i n my f i e l d . 1 was not th eo ry ,

but pra cti ce . !

I never met John Maynard Keynes. Nevertheless , as the hands-on-guy who j u s t

d i d not f i t i n t o t h a t i v o r y tower model, T had to deal with real -wor ld ef fe ct s ofthe f l o a t i n g exchange r a t e system that was born i n 1971 through a mere trade

d i s p u t e u n l i k e B r e t t o n Woods- X b e c m a g l o b e - t r o t t e r r u s h i n g around from one

c r i s i s t o another. I would meet w i t h c e n t r a l bankers and even lectured before them

i n meetings such as i n Pa ri s or i n Toronto, and was asked t o f l y t o B e i j i n g i n

1997 t o meet with the Central Bank of China duri ng the Asi an Currency C r i s i s . SO

what i had t o o f f e r was a f r o n t row se at th at few ever achieved. Milton helped

me appreciate the unique p o s i t i o n I ended up i n - the Bi rd 's Eye view of the wo rld .

There was a f i e r c e b a t t l e between the theories of Keynes and Friedman, i n

e f f e c t , Keynes had advocated t h a t government could s t * * r the economy through t h e

economic tu rm oi l by manipul ating in te re st ra te s and taxes whereas Friedman argued

government could never st ee r the car and a t bes t the ksy re si de d i n the qu an ti ty

o f money. T h i s b a t t l e raged between the 1950s through.the 1970s. Mi lt on was jo ine dby Karl Brunner and A l l a n Mel tze r, who became known as the "monetarists 1' that were

a t f i r s t tr ea te d wi th di sd ai n. But the "ore of the mone tari sts theo ry was deeply

roote d i n the th eo ri es of John Locke (1632-1704),:

David Hume (1711-1776), John

S t u a r t M i l l (1806-1873*, and David R i c a r d o (1772-11833) Eventu ally, duri ng the

Carter Administration of the l a t e 1970s, Congress ordered the Fe der al Reserve t o

take the monetarist arguments s e r i o u s l y .

1


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I d i d not se t out wi th a burnin g d es ir e t o be an academic. Nor did I

seek a journey to change the laws o f economics. I was an an al ys t see kin g on ly

p r a c t i c a l answers to be able to cope with the world and understand investment.

Before fax machines, the anal ysi s I produced was de li ve re d by Western Union

v i a te le x and i n the ea rl y 1980s, sending j u s t one t e l e x on one market cost

$5y,_ttna\enniyaie"ea^

group in cl ud in g previous metals, stock Indexes, and a l l major currencies. The

c o s t t o t ak e a l l t h e s u b s c r i p t i o n s c o u l d exceed $200,000 j u s t i n te le x fees th at

adjusted for i n f l a t i o n i n 20D6 d o l l a r s would be - $2 m i l l i o n . So the audience

j u s t happened t o be t he major i n s t i t u t i o n s and government around the worl d. By

sheer chance, what emerged was a i nc re di bl e opport unity to see l i k e Adam Smith

the r e a l movers and shakers. F i n a l l y , i n 1935, I de cid ed t o open our f i r s t o f f i c e

ou tsi de of the Uni ted State s i n London. The r eas oni ng was t ha t i f T co ul d send j u s t

one te l ex to London and then a l l o w them to r e d i s t r i b u t e from th at po int , the cos ts

Hnild de cl in e and we co uld expand our c l i e n t base i n t o t h e l e s s o r middle c l a s s

of co rp ora ti ons , I met wit h the head of a major Swiss bank i n Geneva. We had become

f r i e n d s and I tr us te d h i s advi ce. I asked him what name t o use. T was assuming

something European. He asked me t o name one European analyst. I was embarrassed. I

Could not . He s ai d th at was h i s po in t. Ha sa id everyone tur ne d t o me because I was

American, and Americans could care le ss i f t h e i r currency rose or f e l l . But Europeans

were trapped i n t h e i r ana lys is by t h e i r pat rio tis m. The B r i t i s h were alweps b u l l i s h

t h e pound; the German the mark, and the French the. frane -

The fundamental problems w i t h economic theor ies i a Just tha t. They are theories,

I did not seek to e s t a b l i s h any new theory' no -l es s cre ate "laws" tha t are f i x e d

and u ny ie ld in g. But we sometimes t r a v e l down a ro ad and ge t hungry. We search for

a pla ce to ea t and on th at ra re oc ca si on, we stumble upon a new di sc ov er y - a gr eat

res tau ran t th at brings , a sm ile to our fac e upon remembering.

The economy i s l i k e a c h i l d , i t grows an d matures. We may expect one c h i l d t c

end up i n one pr of es si on , onl y t o dis cov er they explore an e n t i r e l y d i f f e r e n t path.

The problem w i t h economists i s they have perhaps not seen what T have seen, such as

the vast pool of' funds t h a t runs around the world a l t e r i n g the course of nati ons

and des tr oy in g the be st pla ns o f men and p o l i t i c i a n s .

Why do we need the "New P r a c t i c a l 'Laws' of Global Economics" today r c r e than

ever? The reason i s we ar e f l y i n g i n a j e t but are s t i l l ac ti ng as i f we have a

prop-plane. Many of the p i l o t s could not make the t r a n s i t i o n to a j e t because they

were unable t o respond qu ic kl y to consider the dramatic i ncre ase i n speed. We have

the same problem i n managing t h e economy.

The t he or ie s tha t p r e v a i l today bounce back and f o r t h between Keynes and

Friedman with a l i t t l e Marx thrown i n f o r f l a v o r . Do we increase money supply,

lower i n t e r e s t ra te s and taxes, o r j u s t regu late everything that moves and pretend

we ar e not ta ki ng the toys away from the kids as Marx advocated? Co we i gn or e the

I n v i s i b l e Eland of Smith to the po in t th at we a re b l i n d to the s e l f - i n t e r e s t o f

Government t h a t cannot sleep at nigh t unless i t f e e l s i n complete co nt ro l of our

l i v e s ?

When gold was money, the c a p i t a l flowed between nations only because th er e was, a

David Ricar do ex pl ai ne d, a compara tive advantage..This was t he key to in te rn at io na l

trade - t h e i r d e s i r e t o purchase something one could not obtain l o c a l l y or was a t

a s i g n i f i c a n t l e s s o r p r i c e a l l o w i n g f o r " a r b i t r a g e " t h a t gave b i r t h to insurance

t o cover the r i s k of long voyages. T h i s " a r b i t r a g e " s t i l l e x i s t s today j u s t i n

the form of el ec tr on ic tra din g on a gl ob al sc al e. We need a new und ers tan din g o f

c a p i t a l and hew i t moves because we're not i n Oz anymore Dorothy!

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Most theorie s i n economics are not practical'. because they are based upon

assumptions that are not r e a l . The same problem has wiped out the Investment

Bankers because (1) they create mcdels by young st uden ts who do not understand

market dynamics, and (2) they assume there i s always a market and f a i l to map

those pesty periods when the model would f a i l such as the Great Depr ession.

TnTfiTls'-aitfn^^^

d i f f e r e n c e between the opt im is t and t he pessimist. who both are blown off the

top of the Empire State B u i l d i n g . The Pess imist says immediately - "Oh my God

I am going to d i e l " The op ti mi st can be heard wh ile pa ss in g the 4th f l o o r -

"Well so fa r so gocd l"

i

LAW ffl - C a p i t a l Moves To Avoid Danger G l o b a l l yi

This law would seem to be s e l f - e v i d e n t . We have a l l heard of the " f l i g h t to

q u a l i t y " where i n a domestic econcmic decline, c a p i t a l f l e e s stocks and private

a s s e t s moving to the best q u a l i t y that may be Government short-term paper.

However, c a p i t a l reac ts the same way g l o b a l l y and those reasons are not

always apparent domestically.

(1) c a p i t a l w i l l f l e e a war o r th re at of war. During World War I and I I ,the c a p i t a l flow ed to the United St at es . By the end of World War I I ,

the Unit ed St ate s had 76% of the wor ld gol d res erv es . During the Suez

Canal c r i s i s , th e d o l l a r rose on c a p i t a l f l e e i n g Europe as they once

again perceived a r i s k , although i t ; was very b r i e f . Yet during the

Cuba M i s s i l e C r i s i s , c a p i t a l f l e d the opposite to Europe. The same

was tr ue f o r c a p i t a l began to f l e e i n advance of va ri ous middle east

wars.

12) c a p i t a l takes f l i g h t when i t fears unstable economic conditio ns that

can be caused by i n f l a t i o n , taxation, n a t i o n a l i z a t i o n , g e o p o l i t i c a l ,

or negative perceptions i n p o l i t i c s - a n d th e economy a l t e r i n g confidence

EXAMPLE:

The Great Depression was made f a r worse by p o l i t i c i a n s who d i d not understand

g l o b a l c a p i t a l flows to q u a l i t y . In Herbert Hoover's Memoirs, he has a l l of

the documentation that revealed World War II- began with the f i n a n c i a l markets

i n the 1930s that led to nations attacking t h e i r bond markets tha t led t o the

wholesale col la pse of European debt. Even B r i t a i n went i n t o a moratorium on i t s

debt suspending a l l payments. These defaults: sent c a p i t a l f l e e i n g to the United

S t a t e s causing the d o l l a r to r i s e and i n t e r e s t rat es to f a l l i r r e s p e c t i v e of

Fed p o l i c y . P o l i t i c a n s only viewed the r i s e i n the d o l l a r and responded with

p r o t e c t i o n i s m - Smcot-Hawley i n June 1930 destroying i n t e r n a t i o n a l trade and

sending the economy back i n t o a feu dal st at e of economic dark ages. Had there

been the understanding of the " f l i g h t to q u a l i t y " that can emerge f o r a h ost

of i n t e r n a t i o n a l reasons that swamp the domestic co nd it io ns , perhaps theremay have been some hope.

The 1987 Crash was caused by the form at io n of the G-5 i n 1985 and the p er s is t en t

t a l k about lowering the value of the d o l l a r by 40% to reduce the trade d e f i c i t .

The Japanese, who'had bought up t o 33% or so of the na ti on al debt and loads of

r e a l estate l i k e Ro ck ef el le r Pl aza i n New York, were being t o l d i n d i r e c t l y that-

whatever investments they made were goi ng t o be devalued by 40%. The 1987 cr as h

took plac e wi th everyone befuddled because th er e was no change i n the domestic

fundamental co ndi tio ns of the economy or corporate , earn ing s. The f l i g h t Of

c a p i t a l by the Japanese caused by the G-5, l e d t o the c a p i t a l concentration

i n Japan wit h fore ign inv est ors loo kin g at a r i s i n g yen assets creating the

1989 high. 3


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Another example i s a mincl t w i s t e r . Between 1980 and 1985 I was g i v i n g

l e c t u r e s throughout Europe. The number one qu es ti on T was asked? What

was my op in io n of the Uni ted State s adopting a tw o- ti er curr ency system?

I understood the que stio n onl y because I s t u d i e d money g l o b a l l y and had

a l s o c l i e n t s from South A f r i c a when the re was the Hand and the ''Financial

-Randy"--One currency i s used; don^tica-lly,-^but-It-canriot-be-HseQV-fQr any

purchase o f goods & ser vi ce s ou ts id e the coun try. The ran d toould need to be

converte d t o the " F i n a n c i a l Hand" th at was all owe d to be used e x t e r n a l l y

c r e a t i n g t h e t w o - t i e r system. The Euro-Dollar market had h i t $1 t r i l l i o nn e a r l y i n 1980 as d i d the US na ti on al debt. ;Europeans were convinced the

way t o escape the deht was f o r the US t o cr ea te a two -t ie r currenc y. This

l e d them t o move t h e i r E u r o - C o l l a r d e p os i t s .into onshore domestic d o l l a r

d e p o s i t s . They had assumed t h a t th e E u r o - d o l l a r s would be new "blue" d o l l a r s

worth l e s s than the domestic "green" d o l l a r s . The more convinced the r i s k

was p erc eiv ed , the more c a p i t a l flowed. The Eu ro-Dol lar depo sits dec lin ed

s h a r p l y and t h i s drove t he d o l l a r t o re co rd hi gh s i n 1985. The more b e a r i s h '

Europeans became, th e more b u l l i s h the d o l l a r trend. This was amazing to see.

Government misunderstood c r e a t i n g th e G-5 i n ;1985 announcing they wanted t o se e

t he d o l l a r de cl in e by 40%. The Japanese began t o s e l l US investments taking

c a p i t a l back causing the yen to r i s e a t t a c h i n g o t he rs c r e a t i n g a bubble top.

Law #2 - C a p i t a l Moves G l o b a l l y F or Comparative Advantages i n Currency

The t r a d i t i o n a l Hicardo model of compa rative ;advantage was b u i l t upon a world

when gold was money, We must r e a l i z e t h a t p r i o r t o 197T w i t h o nl y b r i e f exceptions,

the c a p i t a l flowed only because of a comparative advantage r e f l e c t e d i n investment

r a t e s of return, to gain goods t h a t were n o t a v a i l a b l e i n t h e domestic economy, o r

f o r a r b i t r a g e i n s o f a r a s t h e same produce av ai la bl e i n one na ti on was cheaper when

compared t o domestic p r i c e s , then trade i n t e r n a t i o n a l l y would take place e x p l o i t i n g

those d i f f e r e n t i a l s th at was an ea r l y form o f g l o b a l a r b i t r a g e .

However, we a re no lo ng er i n a wor ld of a g o l d sta nda rd where money i s t h e

same r e l a t i v e i n t e r n a t i o n a l l y . Gold might buy more goods i n one na ti on than another,

b ut i t i s t h e d i f f e r e n t i a l i n the p ri ce of goods r e l a t i v e to the same amount o fg o l d t h a t f l u c t u a t e s due t o o t he r e x t e r n a l f a c t o r s - l a b o r & t r a n s p o r t a t i o n c o s t s .

Today, a f l o a t i n g exchange r a t e system has a l t e r e d that time honored t r a d i t i o n an d

t h i s a f f e c t s every economic theory rendering them i r r e l e v a n t .

(1 ) c a p i t a l may now move according to the old p r i n c i p l e s of tr ad e and

seek an arb it ra ge to purchase the same goods cheaper i n another

l a n d th at has a compar ative advantage such as lower labor c c s t s ,

l i t t l e or no tax ra t es , or on seme o c c a s i o n s d e l i b e r a t e p r i c i n g ,

.below cost to gain market share- (ra re event) _

(2) c a p i t a l may also move s o l e l y because of currency f l u c t u a t i o n s , o r

d i f f e r e n t i a l s i n i n t e r e s t r a t e s such as the c a p i t a l outflows from

Japan to gain. the hi gher rat es of i n t e r e s t i n d o l l a r s , where nosuch comparative advantage e x i s t s s o l e l y due t o tr ad e, but the

c a p i t a l fl ow s due t o cu rre nc y may i n f a c t a l t e r the tr ad e balance.

Where under our f i r s t Law c a p i t a l flows to avoid global r i s k , here we f i n d i n

the calm of the storm, c a p i t a l w i l l flow purely accord ing to the ar bi tr ag e i t sees

i n v a l u e s . T h i s i s what H i l t o n Friedman advocated back i n 1953. He saw t h at t h i s

n a t u r a l f l o w would place a check and balance upon governments. I n r e a l i t y , t h i s i s

the manner i n which c a p i t a l also votes r e l a t i v e to the p o l i t i c s of a na ti on . We ar e

no lon ger i n Qz. C a p i t a l w i l l flow not because o f s o l e l y the comparative advantage

i n tr ad e, but i n the val ue of money i t s e l f . They can at tunes both be'arbitrage.


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!

The New

Practical "Laws" j

of Global Economics

There are ether "Laws" tha t now e x i s t al so w i t h i n our new Glo bal Economy,

However, l e t -us s t i c k to these' f i r s t two Laws for. they alone a l t e r every theory

i n ecorrrnics to date. The " p r a c t i c a l " side of these two r e a l i z a t i o n s i s t h a t

t h e e n t i r e f i e l d of economics changes much l i k e what G a l i l e o d i d t o dogma- I f

the planets revolve around the sun rather than the sun around the planet, then

where i s up and where i s down? T r a n s l a t e t h i s i n t o heaven and h e l l , and you can

se e why he was imprisoned f o r l i f e . '

Suddenly, how we manage our economy i s no longe r autonomous. The theory of

chaos you might r e c a l l was exp lai ned th at the f l a p of the wings o f a b u t t e r f l y i n

A s i a Could s e t i n motion changes to the winds i n the Americas. Although extreme,

t h e p r i n c i p l e remains the same - kind of Like a s c i - f i movie - "We a re not al on e* "

Indeed, the actions of one w i l l have an impact upon a l l o t h e r s . We cannot escape th e

consequences of our own ac ti on s- I t i s ju st i i i j j a s s i b l e .

In my gl ob e- tr ot ti ng running between

natlona and ge tt in g to see f i r s t hand what

was baking place,, my eyes opened l i k e never

before. This i s what M i l t o n perhaps saw i n

me before I myself r e a l i z e d t he f u l l scope

o f what I had f a l l e n i n t o . They did not

teach global c a p i t a l flows i n scho ol. They

d i d not even teach hedging and f l o a t i n g

exchange ra te s. Thi s was a f i e l d t h a t j u s t

emerged more ak in to bein g an app ren tice .

But what 1 observed gl ob al ly was the grand

I n v i s i b l e Hand o f Sdam Smith (1723-1790),

y e t on an i n t e r n a t i o n a l l e v e l . The image i n

my mind was each n a t i o n formed a gear i none giant machine we c a l l the economy o f

nations. Turn one, and there M i l l be an

e f f e c t i n a l l ot he rs . We are a l l connected.

How do we c r e a t e a p r a c t i c a l theory? K a r l Marx (1818-1883) saw the co ll ap se

i n ca pi ta li sm as a cl as s struggl e between labor and employer assuming the l a t e r

would ex pl oi t lab or to the point they could no longer consume. He ignored Smith

and paid no mind t o money supply and the boom bust economic cy cl e. He destroyed

(1) personal l i b e r t y p l a c i n g i t i n t he hands o f government for the greater-good,

and (2) ig no re d the s e l f - i n t e r e s t of the st at e t o al so expand i t s p e r so n a l power.

I t was Ivan IV (1533-84) "the Te rr i bl e " who se iz ed land of h i s enemies, and_gave i t

to hi s supporters yet re al is e d i f the workers l e f t , the land became worthless.He enacted a law that the workers (serfa ] could not leave l ay in g the seeds f o r

the Russian rev ol ut io n i n 1917. Cl ea rl y, other ru le r s saw the problem, but did

riothing to correct i t . Alexander I (1777-1825) came t o power i n 1801 and spoke abou

reform, but then Napoleon invaded pu tt in g an end t o th at p o s s i b i l i t y . So Marx

was wrong. I t was not l im i te d to employers, but cou ld a l s o be the st at e tha t in

f a c t e x p l o i t e d t h e people. Handing a l l the asset s to the st at e and des tro ying the

l i b e r t y of in di vi du al s, was not the answer. To f i x what i s wrong, r e q u i r e s a c l e a r

working knowledge o f what we ar e tr yi ng to f i x , " Bad th eo ri es and assumptions have

l e d to the deaths of m i l l i o n s . We need " p r a c t i c a l " economics - not t heo rie s.


6/19

XffTimes Like The Present

Should Follow Keynes o r Friedman?

or Do Wg. freed a New Theory Altogether?

un


7/19

I

The invention o f money brought w i th i t t h e n a t u r a l consequence o f the i n e v i t

a b l e c o u n t e r f e i t i n g . However, c o u n t e r f e i t i n g has never r e s u l t e d i n widespread

i n f l a t i o n even when used f o r the m i l i t a r y purpose'of undermiruug the currency o f

one's opponent used by England against the American colonies during the Revolution

as well as d u r i n g tftf I I , The sin gle greatest threa t t o th e money supply has

always come from the i s s u i n g government i t s e l f . "

The above c h a r t i l l u s t r a t e s the metal content o f the Roman Monetary System.

I t was the steady debasement o f the s i l v e r content o f the Roman Denarius t h a t

f i n a l l y l e d t o an a l l out coll apse during t h e T h i r d Century AD, F or c e n t u r i e s ,

governments have sought t o expand t h e i r money supply by debasing the currency. I nOther words, reducing the content o f precious metals t o enable the same amount

Of gold and s i l v e r t o create more coinage. The economic advisor t o Queen E l i z a b e t h I

C o r r e c t l y observed the response t o such p r a c t i c e s among the p o p u l a t i o n . I t was

one Of th e e a r l i e s t Economic Laws e s t a b l i s h e d - B ad money d r i v e s good mcney o u t Of

c i r c u l a t i o n - s i r Thomas Gresham (1519-1579 AD). H i e economic hardships that

E l i z a b e t h faced during her r e i g n between 1533 and 1603 i n c l u d i n g the defeat o f

the Spanish Armada, put great econcmic pressure that was seen i n the debasement

of coinage. Indeed, Gresham" s Law proved t o be c o r r e c t d u r i ng the 1960s when

s i l v e r was taken out of modern coinage being replaced wit h n i c k e l and copper.

The s i l v e r coins q ui ck ly disappeared and were worth a premium t o the "bad" money

t h a t entered the world economies.

The notion about watching th e money has been around f o r a long time - f a rlonger than Keynes i a n theory. H i e famous economist o f the Great Depression e r a

I r v i n g F i s h e r (1867-1947) d e r i v e d a formula i n 191T i n s p i r e d by John S t u a r t H i l l ' s

a n a l y s i s c r e a t i n g the "quantity theory" o f money.being MV PQ. The "V" i s th e

v e l o c i t y o f "M" money supply where t h e "PQ" represents G)P f f P" being the p r i c e

l e v e l , and "Qn being the q u a n t i t y o f goods & s e r v i c e s produced). This equation

Can be reduced t o e x p l a i n the Monetarist theory i n i t s most s i m p l i s t i c form, t h a t

a manipulation o f "M" (monev suoolv) w i l l c r e a t e a d i r e c t a f f e c t i n "P" ( p r i c e s )

t h a t we i n s t i n c t i v e l y view as " i n f l a t i o n " d e f i n e d as (too much money chasing to o few

goods). H i s t o r i c a l l y , i t was always the supply o f money and i t s q u a l i t y t h a t had th e

impact upon the economy o f mankind.

7


8/19

!

The Mon etar ist s main tain t hat an, inc rea se i n government spending w i l l not

d i r e c t l y af fe ct pri ces unless ihe mcney e-ppiyaLao c^ar.gasJ This i s a very ^ r i ~ r ; a l

p o i n t t o keep I n mind. People g e n e r a l l y assume that a d e f i c i t i n spending w i l l

be- d i r e c t l y i n f l a t i o n a r y . We must r e a l i s e that the gold standard i s dead- What we

even d e f i n e as "money" w i t h i n Hi e f f e c t s our e n t i r e concept o f how t o manage the

econcmy as a whore.---If b o n d s - a r e - ^ Q t p ^ t - Q ^ ^ e H ^

n e i t h e r would d e r i v a t i v e s on such products. These ideas a r e o b v i o u s l y wrong i n

the face o f our current c r i s i s . Under M l , d e r i v a t i v e s do no t e x i s t .

He do n o t l i v e i n a p u r e l y Keynesian world. The F e d e r a l Reserve does i n f a c t

seek t o manipulate the money supply as p a r t o f i t s t o o l s . F i r s t , there i s t he

discount rate where i t l e nd s money t o th e banks t h a t i n turn lend money i n t o t h e

economy i n normal c o n d i t i o n s when no t covering losses i n a c r i s i s . I f th e Fed

r a i s e s o r lowers the r a t e o f i n t e r e s t , i t w i l l i n 'theory a ff e c t the lending o f

the banks by reducing t h e i r borrowings by r a i s i n g rates higher. But i f the debt

c r i s i s i s causing a c o l l a p s e , then people w i l l pay higher rates t o s t a y a f l o a t .

Therefore, we must be c a u t i o u s about making t o o many assumptions based upon the

perf ect world. This c an d i r e c t l y increase o r decrease t h e money supply through

the lending t o banks, but i t i s not a. l i m i t a t i o n upon the borrowing t h a t i s being

employed as th e t o o l , i t i s t h e i n d i r e c t e f f o r t t o a f f e c t demand by i n t e r e s t r a t e s .

Second, t h e money supply i s more d i r e c t l y manipulated by th e buying and s e l l i n g

of Government bonds. The Fed can increase the money supply as defined by Hi through

buying Government bonds from the p u b l i c i r r j e c t i n g t h e r e f o r e cash. I t can reduce

money supply by s e l l i n g Government bends i n t o t h e market t a k i n g i n excess cash.

These assumptions are what were taught i n s c h o o l , but guess what? They a r e

wrong I This e nt ir e model i s based upon the assumption o f a gold standard and a

r e l a t i v e l y closed economy. L e t us say that the Fed d e s i r e s t o s t i m u l a t e the economy

SO i t i n c re a s es t h e money supply i n theory by buying Government bonds. This would

work assuming the s e l l e r t o the Fed i s a l o c a l r e s i d e n t . I f China decided t o s e l l

US bonds i t holds because i t suddenly needs cash, the Fed purchase w i l l not then

s t i m u l a t e t h e (Infill l< eomomy a t a l l f o r t h e money i n j e c t e d i n t o t h e system i s

headed t o China- Hence, an increase i n money supply i s not always i n f l a t i o n a r y I

Our d e f i n i t i o n o f money i s f a r t o o narrow i n a F l o a t i n g Exchange Rate System.

I f we look a t a piece o f r e a l estate that changes : hands f o r $1 b i l l i o n and one

American s e l l s i t t o another, the net e f f e c t i n t h e money supply i s zero. However,

i f Japan enters and buys t h a t same piece o f r e a l e s t a t e , they br in g yen, conver t

i t t o d o l l a r s , an d now one American has $1 b i l l i o n i n h i s pocket that did not e x i s t

p r e v i o u s l y ! M i l t o n may no t have witnessed what I have seen f i r s t hand, bu t he

saw that t h e p o s s i b i l i t y e x i s t e d where changes i n the supply o f money d i d not

e f f e c t merely p r i c e s i n t h e i n f l a t i o n a r y model, but economic a c t i v i t y . That has

come back t o haunt us i n a F l o a t i n g Exchange Rate System t h a t goes f a r beyond

what M i l t o n e n v i s i o ne d back i n 1953.

The Monetarists assumed t h a t v e l o c i t y was s t a b l e and thus an increase i nmoney supply would r e s u l t i n g r e a t e r spending of the e x t r a cash on goods and s e r v i c e s

causing Q> t o r i s e . The Fe d could slow t h e growth r a t e b y s e l l i n g bonds t a k i n g

cash ou t o f the system. But these assumptions are not r e a l , f o r the v e l o c i t y can

and w i l l change depending upon ''confidence" and i n a F l o a t i n g Exchange Rate System

the Fed cannot d i r e c t l y be sure i t i s p u t t i n g money i n t o o r t a k i n g ou t of th e system

when t h e r e a r e foreign holders o f debt. The model begins t o decompose under our

new dynamic g l o b a l economic system.

8


9/19

Keynes disagreed with t h e Monetarist's Uew that money s u p p l y was th e ke y.

Keynes a c t u a l l y began w i t h a focus upon money supply and evolved into t h e p o l i c y

theory o f i n t e r e s t r a te s and tax manipulation, whereby M i l t o n began w i t h the

Keynesian model and r e v e r t e d back t o study money supply concluding that Keynes would

create massive new spending t h a t would only lead t o i n f l a t i o n . Was he c o r r e c t ?

Keynes bought i n t o t h e money supply model a f t e r v i e w in g the hyper i n f i a t i f ^ _

cif" rnenSerinan Weimar Republic between f921~and'"i 924 T Keynes viewed i n ' h i s T r a c t on " "

Monetary Reform t h a t i t was t h e increase i n t h e q u a n t i t y o f money t h a t caused t h e

population t o spend money f a s t e r t h a t i n t u r n l e d t o e s c a l a t i n g p r i c e adanvances.

However, Keynes f l i p p e d p o s i t i o n s a f t e r t he Great Depression i n h i s General Theory

he b e l i e v e d i t was a c o l l a p s e i n demand r a t h e r than money supply, that l e d him

to his tools o f i n t e r e s t r a t e s and taKes. Keynes saw no reason why t h e v e l o c i t y

o f money would remain s t a b l e . Keynes was no t sure t h a t a mere i n c r e a s e i n money

supply would t r a n s l a t e i n t o more spending o f excess cash. He recognized that an

i n c r e a s e i n money supply may not produce an i n c r ea s e i n v e l o c i t y f o r people could

s t u f f i t i n t h e i r mattresses, and thus the d e c l i n e i n v e l o c i t y would negate t h e

i n c r e a s e i n money supply. Keynes a l s o argued that others may hoard cash t o a l s o

speculate i n stocks o r bonds. Keynes thus saw t h a t i n t e r e s t r a t e s c o u l d e f f e c t the

s p e c u l a t i v e demand and i n h i s mind had a more d i r e c t e f f e c t than money supply

concluding that a i n c r e a s e i n money supply might be o f f s e t by a i n c r e a s e i n hoarding.

Keynes thus took t h e a n t i - M o n e t a r i s t p o s i t i o n i n a l e t t e r a d v i s i n g P r e s i d e n t

F r a n k l i n D. Roosevelt;

"Seme people seem t o i n f e r ... t h a t output and -~xme c a n be

r a i s e d by i n c r e a s i n g the q u a n t i t y o f money. B ut t h i s i s l i k e

t r y i n g t o get f a t by buying a l a r g e r b e l t . In the United States

today your b e l t i s plenty big enough f o r your b e l l y . 1 1

The Co lle ct ed Writi ngs o f John Maynard Keynes (Vol XXI^ p294)

London; Macmillan/St. Martin's Press f o r the Royal Economic S o c i e t y 1973

Roosevelt took t h e money approach by (T) c o n f i s c a t i n g a l l g o l d, and (2) he

then devalued the d o l l a r o f f i c a l l y i n c r e a s i n g t h e supply o f money r e l a t i v e t o

g o l d by r e v i s i n g t h e system from $20 f o r an ounce o f g o l d t o $35. This did no t

have t h e widespread e f f e c t t h a t he perhaps s e c r e t l y b e l i e v e d - Roosevelt a l s omade i t i l l e g a l , f o r Americans t o own -gold. That was no t o v e r r u l e d u n t i l 1975. I t

was presumed t h at i f the p u b l i c c o u l d s t i l l hoard g o l d , they would do so, and

defeat the best e f f o r t s t o i n f l a t e . There was something l u r k i n g i n t h e bushes

t h a t was a l s o the s i l v e r l i n i n g i n t h e dark clouds o f the Great Depression. I t

was nature and he r 7 year drought o f B i b l i c a l proportions as i n the s t o r y o f

Joeseph. The Great Depression f o r c e d a new age o f progress by n e c e s s i t y - th e

new age o f s k i l l e d l a b o r f u l f i l l i n g the culmination of the I n d u s t r i a l R e v o l u t i o n .

Keynes thus viewed the world e n t i r e l y d i f f e r e n t l y . Keynes saw t h a t the economic

f o r c e s o f production were motivated through i n t e r e s t r a t e s and investment r a t h e r

than consumption. Keynes was perhaps t o o deeply i n v o l v e d i n hi s personal world o f

investment t o see the other side of th e s t r e e t . Keynes b e l i e v e d t h a t t o ge t GDP

t o r i s e , i n t e r e s t r a t e s had t o be lowered t h a t would s t i m u l a t e borrowing from banks

t o buy th e goods and s e r v i c e s - Thus, he saw t h e Great Depression as a c o l l a p s e i n

t h i s demand.

Keynesian economics has been proven t o be f a l s e j u s t l o o k i n g at th e d e c l i n e

i n Japan. The i n t e r e s t r a t e s t h a t f e l l to near ly zero d id noth ing t o r e s t a r t .demand

and because of th e F l o a t i n g Exchange Rate System, there was an escape v a l u e - th e

a b i l i t y t o borrow yen f o r next t o nothing and i n v e s t i t overseas e a r n i n g 600%

more and t h a t would have no e f f e c t upon s t i m u l a t i n g domestic demand. By t h e 1950s,

M i l t o n had moved away from Keynesian ideas he harbored i n t h e 1940s viewing that

i g n o r i n g t h e money supply was a s e r i o u s e r r o r .

9


10/19

M i l ton broadened h i s view to supp ort the id ea th at the demand f o r money an d

v e l o c i t y was st ab le by tu rn in g to the long-term fa ct or s of educ atio n, hea lt h and

income of the fam il y or i n d i v i d u a l over decades - the savin g fo r reti reme nt approach-

M i l t o n al so atta cked Keynesian idea s tha t consumption rose and f e l l along wit h the

short-term income. H i l t o n argued t h a t people took a longer-term view t o t h e i r l i f e

and finances. H i l t o n was co rr ec t, f o r there would be no market f o r L i f e Insurance

" i F ' f f i ^ i e ^ T o i H i h ^

viewed t h a t consumption would be als o st ab le f or th e long-term expe ctati ons of the

family or i n d i v i d u a l -

i

I f we lo ok a t th e event s o f the Great Depressi on, i t i s hard t o see how

Keynesian economics would have r e a l l y worked, i n t e r e s t rat es coll aps ed foe three

primary reasons with no economic e f f e c t ; (1) the Fad di d lower ra te s , (2) there

was a f l i g h t t o q u a l i t y f o r c i n g short-term rates to near zero as we have seen

recently, and (3) there was c a p i t a l f l i g h t from Europe dur ing the ea rl y stages

due to the widespread d e f a u l t s o f European government debt t h a t a l s o impacted

domestic p o l i c y f o r c i n g i n t e r e s t rates lower even i f the Fed d i d not want to see

such a decl ine .- The Fed co ul d not lower i n t e r e s t rat es to stim ula te the economy.

That w i l l only help during b u l l markets where there i s "confidence" to inve st

f o r a p r o f i t i n any ev ent . Lowering taxes d i d not r e a l l y matter because there was

no p a y r o l l tax u n t i l a f t e r World War I I and th e r i c h were l o s i n g money p r o f u s e l y .

I f i n d i t h a rd a f t e r j u s t reading the memiors of Herbert Hoover and the serious

documentation a v a i l a b l e t o prove to me t h at Keynes would have helped- The massive

runs on banks took place on rumors th at FES was going to co nf is ca te go ld . He denied

that as absurd the ni gh t of the e l e c t i o n . But the rumor pe rs is te d and l ed Co

Tiassive bank runs. Hoover cou ld not stop i t fo r i t was not a " c r e d i t " c r i s i s as

much as i t was a sheer f l i g h t t o q u a l i t y . The ma jo ri ty of banks f a i l e d a f t e r the

e l e c t i o n of FDR and h i s ina ugu rat ion . Hoover wrote l e t t e r s to FDR pl ea di ng wit h

him to reassure the people he had no such plan- But FDR remained s i l e n t . Had the

Fed pro vid ed cash loans to th e banks, i t would have been f r u i t l e s s .

H i l t o n viewed the Great Depression from a money per spe cti ve. He was co rr ec t,

the fea rs and u nce rta int y of the times l e d to boa rdi ngo f gol d. Thi s no doubt

contributed to what H i l t o n saw as a co ll ap se of one -t hi rd of the money supply

during the Great Depression. I t i s hard to imagine premis ing to lower taxesand i n t e r e s t r a t e s would have much impact when the world seems t o be ending..

I be li ev e i t was Abe Li nc ol n who argued that you can f o o l seme of the people

some of the time, but you cannot f o o l a l l o f t h e people a l l of the time. Th is i s

c l e a r l y a lesson p o l i t i c i a n s need t o l e a m . The people do look t o th e fu tu re and

w i l l spend more of t h e i r income i f t he y " f e e l " t h a t t h e i r home i s r i s i n g i n v a l u e .

When housing pr ic es de cl in e, savings r i s e , because people do i n f a c t respond t o

t h e i r longer-ter m ex pe ct at io ns . Th is br in gs us t o the qu es ti on of tax cut s and

do they even work? i n T964, a tax cut was made and t h i s was viewed as a permanent

cut In p a y r o l l taxes. The economy expl oded and the re was th e gr ea t boom i n

mutual funds that led to w i l d sp ec ul at io n wit h the hig h i n 1966. By the time

we see the co ll ap s e, the re was f e a r about i n f l a t i o n due to th e spendi ng f o r

the Vietnam War. i n I960 Congress passed what i t marketed as a temporary taxsurcharge to sto p i n f l a t i o n . True, consumers spent l e s s , but they drew down

savings t o maintain t h e i r consumption, i n 1975, th er e was th en a temporary

tax rebate to stim ula te the economy going i n t o the steep de cl in e f o r 1976.

Hone of these changes i n temporary taxes di d anything s i g n i f i c a n t . Where

the 1964 p a y r o l l ta x cu t too k pl ac e and was pe rc ei ve d as permanent, there

we f i n d a surge of investment pl an ni ng f o r the long-term as Friedman expected.

The em pi ri ca l evidence suggests t ha t one-time rebates w i l l not stimulate the

economy because the people are q ui te fr an kl y - not s tu pi d! The on ly h i s t o r i c a l

evidence o f a tax cu t st im ul at in g the economy i s a permanent change not one-offs*

'0


11/19

We are not concerned with the absurd arguments that the average person does

not weigh the budget d e f i c i t when he i s buyi ng eggs- These s o r t s o f c r i t i c i a n s

malign the i n t u i t i v e nature of the peopl e as a whole- For example, when Paul

V o l k e r r a i s e d i n t e r e s t rates t o unheard o f l e v e l s t o f i g h t i n f l a t i o n i n the

e a r l y 1980s, my mother and her s i s t e r ran out and bought CDS f o r 10 years a t

f a h ^ ' w i f h-

i n t e r e s t rates"of about 15 percerTrT She did not_ask"7ne"~anyadvtcn

She i n s t i n c t i v e l y knew t h i s was a deal o f a l i f e t i m e . For th e nex t decade, they

made a fortune- Di d they weigh i n f l a t i o n r e l a t i v e t o the i n t e r e s t r a t e ? Perhaps.But they c l e a r l y di d not see i n f l a t i o n as r i s i n g f a s t e r than the r a t e o f i n t e r e s t

o r they would have h e s i t a t e d as was the case du ri ng t h * German H y p e r i n f l a t i o n .

Did they have a model? Wo! Di d they make some i n s t i n c t i v e d e c i s i o n based upon

n e r s o n a l observ ation without e m p i r i c a l data? A b s o l u t e l y . Sorry, t r y i n g to impute

knowledge that must be somehow q u a n t i t a t i v e on a p r o f e s s i o n a l l e v e l t o the

g e n e r a l p u b l i c , makes no sense. Sometimes we f o r g e t , that i f aiongh l i t t l e old

l a d i e s ru n oa t and s h i f t their demand deposits t o long-termf i x e d rates, they

do cause a c o n t r a c t i o n i n Ml as we c a l c u l a t e our world-

M i l t o n was c o r r e c t - Keynesian models promote i n f l a t i o n with no o b j e c t i v e .

They are i n d i r e c t and may assume t h a t an increase i n government spending w i l l be

i n f l a t i o n a r y , but this i s j u s t not always t r u e , i f there" a r e ' e x t e r n a l f a c t o r s

t h a t are o f f s e t t i n g the spending such as a c a p i t a l withdrawal from outside thedomestic economy. The assumption t h a t even w i t h i n a c l o s e d economy t h a t an

i n c r e a s e i n spending w i l l cr ea te econcmic growth o f a t a n g i b l e nature i s a l s o

f a l s e - j u s t look a t the German H y p e r i n f l a t i o n . We saw the period of the 137B

start of i n f l a t i o n d e l i b e r a t e l y created and t a r g e t e d to in cr ea se .the money supply

by overvaluing s i l v e r r e l a t i v e t o g o l d , f a i l e d t o produce the expected r e s u l t

f o r g o l d was being drained by foreign investors replacing i t w i th s i l v e r u n t i l

the e n t i r e experiment, led to J.P Morgan having to b a i l o u t the nation lending the

US Treasury g o l d . The d e l i b e r a t e c r e a t i o n of money that was cheaper than the

world standard , l e d not to econcmic growth, but economic d e c l i n e i n a s i m i l a r

fashion t o the German H y p e r i n f l a t i o n o f the 1920s, but to a much l e s s extent-

Law #3 (Gresham's Law) BAD Money Drives Out Good

While Gresham's Law was based upon a Gold Standard and t h a t by debasing-

the pre cio us metal cont ent causes the hoarding o f hig her conte nt coinage,

i n a f l o a t i n g exchange r a t e system, i t s t i l l works by d r i v i n g r e a l wealth

out of a n a t i o n f l e e i n g t o another currency by c r e a t i n g excess currency.

Law #4 Only Permajynt Reductions i n Taxes Produce F


12/19

S e t t i n g a s i d e the accolades, the government could no t h e l p but lower i n t e r e s t

rates during an economic d e c l i n e . C a p i t a l w i l l f l e e t o government debt as long

as i t perceives the r i s k t o be i n the p r i v a t e s e c t o r . Hence, c a p i t a l w i l l move

t o t h e government debt bidding higher i n p r i c e f o r c i n g y i e l d s { i n t e r e s t r a t e s )

t o d e c l i n e . So Keynesian theory does no t work. I t i s assuming government has

" "seme"effect when i t i s n ~ 6 t ~ ~ i n 7 " t f i e ' ^ i V e r ^ e a t ^ I r ^ i ^ K e e p s " i n t e r e s t r a t e s so- "

a r t i f i c i a l l y h i g h , p r i v a t e economic commerce w i l l c o l l a p s e and government expendi

t u r e s would r i s e sharply due s o l e l y t o i n t e r e s t r a t e s c a u s i n g both the money supply

and economy t o c o l l a p s e . Lowering i n t e r e s t r a t e s below w o r l d l e v e l s as d i d Japani n t h e 1990s, f u e l s c a p i t a l f l i g h t t o h i g h e r y i e l d s p r e v e n t in g domestic increases

i n money supply defeating any intended stimulation package.

L i k e w i se , i f money supply i s j u s t i n c r e as e d assuming i t matters no t how i ti s

increased o r spent, t h i s s o r t o f untargeted' wholesale spending w i l l promote i n f l a

t i o n causing c a p i t a l f l i g h t t o other lands. Cur ren tly , the re a r e proposals t o

spend money on i n f r a s t r u c t u r e - T h is i s a throw back t o Roosevelt and t he WPA. But

t h i s demonstrates how a l i t t l e - b i t o f knowledge can be dangerous. Th e WPA worked

because unemployment rose t o 25% during the Great Depression when we were s t i l l ,

40% agrarian when there was a 7 year drought known as t h e Dust Bowl . Government

was s t i l l q u i t e s m a l l . The federal reserve was created only i n 1913 and there was

t h e i n t e r s t a t e Commerce Commission. There was no p a y r o l l t a x and no s o c i a l s e c u r i t y .

Today, the growth i n government s t a t e and f e d e r a l has become n e a r l y t h a t 40% l e v e l .

More government programs may k i l l the e n t i r e goose b r i n g i n g back t h e good-old days

and the complaints a g a i n s t Constantine the Great (306-337AD) that there were more

- people c o l l e c t i n g taxes than paying them. F o r unemployment today t o reach 25%, i t

would r e q u i r e a c o l l a p s e i n governments throughout the s t a t e s and m u n i c i p a l i t i e s .

T h i s becomes p o s s i b l e because we have t h e f e d e r a l income t a x competing f o r revenue

a g a i n s t t h e state and. l o c a l e n t i t i e s causing the ta x base t o c o l l a p s e .

i n our mcdern-day economy, the k i n g has no c l o t h e s , b u t no one w i l l t e l l him.

Money i s c r e a t e d by v e l o c i t y . T h is i s agreed upon by a l l persons. The leverage i n

the banks they created with t h e i r u n r e g u l a t e d d e r i v a t i v e s markets between themselves

i s a t least 30:1. Our d e f i n i t i o n o f money i s f a r t o o narrow today. I t cannot be

l i m i t e d t o demand deposits and cash. I t must i n c l u d e bonds, s t o c k s , and a l l suchf i n a n c i a l instruments from money-market funds t o .derivatives. I f we stop ignoring

r e a l i t y , j u s t maybe we can f i g u r e out th e r u l e s . I f d e r i v a t i v e s a r e no t money, then.-

what were we so s t r e s s e d about b a i l i n g out bankers? I t i s n o t r e a l ! Right? Poof!

I t ' s n ot there as a magic t r i c k . We have t o s t o p d e f i n i n g money so narrowly i f we

rush t o b a i l o u t housing, banks, and manufacture b u t none o f t h a t we consider money.

So how do we f i x what we do not even define properly?

Once we accept r e a l i t y and ask th e average person i f h i s house i s p a r t o f h i s

assets he considers wealth, then we w i l l r e a l i z e t h a t t h e t r u e p i c t u r e o f money

I s what people b e l i ev e i t t o be - no t what economists c l a i m . T h i s i s why we a r e

b a i l i n g o u t t f e n o r t g a g & - d e r i v a t i v e c r i s i s , because i t i s money. Hence, i f the

e l e c t r o n i c money created by th e p r i v a t e s e c t o r through v e l o c i t y in c lu d es the 30:1

leverage, we c an see t h a t i n c r e a s i n g the money supply t o compensate f o r the d e c l i n ei n the v e l o c i t y t h a t was e f f e c t e d by the 30:1 leverage, brings in to focus the

problem o f money supply. There i s no way t o i n c r e a s e t h e government spending by

30 times t o o f f s e t the d e c l i n e i n v e l o c i t y . Even i f we look a t a 10 f o l d increase,

i t i s s t i l l f a r beyond what c o u l d be absorbed. T h i s type o f an increase i n money

supply would be h y p e r i n l a t i o n a r y t o say th e l e a s t . I t would be wide spread t h a t

.everyone would be i n f l u e n c e d and c a p i t a l would then run t o t a n g i b l e a s s e t s and f l e e

government debt f o r c i n g t h a t a l s o t o go i n t o d e f a u l t o r j u s t be monetized.

Because we ar e i n a g l o b a l economy, i f th e Fed buys bonds t o i n j e c t c a p i t a l

i n t o the economy, those bonds may be h e l d by f o r e i g n i n v e s t o r s who take the money

heme. I f we lower i n t e r e s t r a t e s so f a r , c a p i t a l w i l l f l e e t o other lands t o get

the higher y i e l d as what took place i n Japan. We l i v e i n a whole new world.


13/19

i

i

The La st Too l Stan ding ^

Obviously,, we cannot j u s t c r e a t e v a s t amounts o f cash and j u s t spend i t

w i l d l y w i t h o u t c r e a t i n g a wave o f i n f l a t i o n t h a t would cause r e a l c a p i t a l and

wealth t o f l e e t o other lands. We cannot a r t i f i c i a l l y r a i s e o r lower i n t e r e s t

r a t e s a g a i n s t the na tu ra l trend without e it he r causing a competing force that

"attracts c a p i t a l " or"fuel"s-

the""asset

tnfiatiocn-

ncjr can we~drop i n t e r e s t r a t e s

or r a i s e them a r b i t r a r y t o world l e v e l s without causing c a p i t a l t o f l e e f o r

higher y i e l d s o r f o r e i g n c a p i t a l t o a r r i v e t a k i n g i n t e r e s t earnings home d r a i n i n g

domestic r e s o u r ce s . I n t e r e s t r a t e s & money supply are s u b j e c t t o g l o b a l t r e n d s .

T h i s i s 'why we have the New P r a c t i c a l "Laws" o f G l o b a l Economics. We are not

alone and whatever we do w i t h money supply o r i n t e r e s t r a t e s can a t t r a c k o r r e p e l l

both domestic and f o r e i g n c a p i t a l . We cannot continue: under f a l s e assumptions. We mus

face r e a l i t y . Why d i d H i l t o n come l i s t e n t o me? Because where we may have disagreed

on the presumption t h a t the v e l o c i t y o f money was s t a b l e , we agreed on one p o i n t

th at stands behind these "Laws" o f economics. M i l t o n saw t h a t a f l o a t i n g exchange

r a t e system back i n 1953 would a c t as a check and : balance upon the governments o fthe world. Many c r i t i c i z e d M i l t o n and thought he was nuts. Bu t he was c o r r e c t * He

saw i n theory i n T953 what I have witnessed i n p r a c t i c e . T h i s i s were theory and

o b s e r v a t i o n have met. Whatever we do, we w i l l e f f e c t the world j u s t as the-world

w i l l e f f e c t what we do . This i s perhaps i m p l i c i t i n t h e "contagion" that people

see as th e debt c r i s i s spread around t h e globe l i k e t h e l a t e s t s t r a i n o f f l u .

The money supply and i n t e r e s t r a t e s a r e t r u l y created no t by t h e man s i t t i n g

behind the c u r t a i n i n Oz. Ihey a r e c r e a t e d by th e i n t e r a c t i o n o f the people and

how they respond t o both p r i v a t e and p u b l i c events t h a t impact t h e i r long-term and

short-terra f i n a n c i a l expectations. This i s t h e essence of the " f l i g h t t o q u a l i t y "

d i c t a t e d by th e I n v i s i b l e Hand, o f Adam Smith, who: wrote " i t i s n o t from the benevo

lence of th e butcher ... t h a t we expect our d i n e r , but from [hi s] regard t o [ h i s ]

own i n t e r e s t . " Wealth o f Nations, V o l I , p26-27 (Oxford: Clarendon ed. 1976).

As already explained, both money supply and i n t e r e s t r a t e s cannot be confined

t o purely domestic impact. We cannot count on th e "benevolence" o f f o r e i g n i n v e s t o rs

or states t o simply buy ou r debt t o s t i m u l a t e o u r economy c o n t r a r y t o t h e i r own s e l f -i n t e r e s t s . We have t o r e s p e c t i n t e r n a t i o n a l c a p i t a l flows o r we w i l l send ou r own

economy back i n t o the stone age. We cannot s t i m u l a t e domestic i s s u e s e x c l u s i v e l y by

using purely i n t e r e s t r a t e s o r money supply theory by government spending.

The l a s t domestic t o o l standing i s t a x e s . Here too, we c a n r a i s e taxes and send

c a p i t a l f l e e i n g t a k i n g w i t h i t j o b s . Bu t we ca n lower taxes t o create jobs domestica l

as w e l l . Taxation i s a b a r b a r i c r e l i c . o f t h e past t o i n c r e a s e t h e money supply of the

s t a t e (king) l i k e war. ar e no longer on th e Gold Standard so t h e r e i s no need t o

t a x o r wage war f o r p r o f i t when money i s e l e c t r o n i c anyway, we must d i s t i n g u i s h t h at

s t a t e a l o c a l government need t a x a t i o n because they lack the power t o c r e a t e i t . They

must l e a r n t o be c o m p e t i t i v e t o a t t r a c t j o b s , but th e Feds no l o n g e r need inccane taxe

Honey can be c r e a t e d i n a d i s c i p l i n e d manner. M i l t o n even suggested a negative t a x r a

t h a t was an automatic: payment t o lower income that enabled a steady increase i nmoney supply. The p a y r o l l t a x merely borrows from: the poorest i n t e r e s t f r e e and

then hands back a r e f u n d as i f i t were Christmas. The 1964 t a x c u t was a permanent

c u t and that sparked economic growth. Oneoff t a x c u t s i n trou bled times never

worked because when confidence i s low, people w i l l save r a t h e r than spend f o r t h e

f u t u r e .

The only v ia b le t o o l we have i s t he f e d e r a l income tax. The o n l y way t o

spark a econcmic boom and create jobs, i s t o e l i m i na t e i t and make American l a b o r

competitive. The j o b s would pour back j u s t as Hong Kong grew because i t had o n l y

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i

a 15% t a x r a t e that was lower than t h e r e s t of th e wor ld. There a r e those who

would assume that i f government p r i n t e d the money i t needed that that would be

i n f l a t i o n a r y . This i s a matter o f d e f i n i t i o n . They forget that we issue t r i l l i o n s

of d o l l a r s through our borrowing i n t h e form o f bonds. However, i f bonds, s t o c k s ,

r e a l estate and d e r i v a t i v e s a r e outside of our d e f i n i t i o n o f money, then t h i s 18th

century t h i n k i n g makes sense. Sorry, i n t h e r e a l .world a bond i s s t i l l money.

Between 1986 and 2006, t h e n a t i o n a l debt rose frcan about 32.1 t r i l l i o n t oJ8-.5 t r i l l i o n . This took place n ot i n p r i n t i n g money, b ut i n bonds. I n f a c t , we

were f o r c e d t o i s s u e more debt j u s t t o pay the i n t e r e s t on debt. The i n t e r e s t

payments f o r t h i s 20 year p e r i o d was $6,141 t r i l l i o n . Had we p r i n t e d the d e f i c i t

between t a x a t i o n and spending (excluding interest)> that would have amounted- t o

o n l y $259 b i l l i o n a f a r c r y from t h e b a i l o u t s . I f we a re already committing b i l l i o n s

i f no t beyond 1 t r i l l i o n f o r rescue, we cannot a f f o r d t o borrow oh top o f t h i s .

The very idea t h a t we borrow money r a t h e r than p r i n t i t i s somehow l e s s i n f l a

t i o n a r y i s absurd and a throw-back to the Gold Standard when nature c o n t r o l l e d th e '

q u a n t i t y o f money. Spain borrowed h e a v i l y on th e go ld i t expected from America. When

i t s trea sure ships did n't show up an d i t l o s t the Spanish Armada aga ins t England, t h e

d e f a u l t destroyed the bankers i n Veni ce and rel ega ted both Spain and I t a l y to- almost

t h i r d world s t a t u s . The Spanish I n q u i s i t i o n merely caused the jews t o f l e e t o Holland

t r a n s f e r r i n g banking to Northern Europe.- We. cannot a f f o r d the same mista kes. Sorrowing

i s a ancient t r a d i t i o n when there was ho other choice .

The Go ld Stan dard & Cronic Shortage o f &mey

They say h i s t o r y i s biased - f o r i t i s w r i t t e n by th e v i c t o r . But. we can a l s o

remember things o f days long s i n c e past with rose-colored g l a s s e s . Some see gold as

almost a r e l i g i o n - th e s a v i o r t h a t w i l l d e l i v e r ;us from t h e e v i l o f i n f l a t i o n . That

i s j u s t n ot t r u e . The boom-bust c y c l e e x i s t e d i n .ancient times as w e l l and always we

f i n d no matter what system i s i n pla ce, there i s . someone who .always spends t o o much.

The Gold Standard was a world t h a t was no t so s i m p l i s t i c . I n anci ent times,

i t provided t h e i n c e n t i v e f o r war - t h e best way t o increase money supply. I n

f a c t , one o f th e reasons there are so many ancient coins t h a t have survived i sthere was th e p r a c t i c e o f burying the p a y r o l l before b a t t l e so t h a t the other

s i d e was denied the s p o i l s o f war.

The Gold Standard a l s o meant t h a t th e way t o create more money was through

reducing t h e metal content - debasing the q u a l i t y o f the metal. Those who were

l o o k i n g t o be dishonest had two options - {1) c o u n t e r f e i t i n g , o r (2) c l i p p i n g .Take a c o i n out of your pocket and you w i l l see reeding on th e edges o f an

American dime o r quarter fo r example. This was an o l d a n t i - c l i p p i n g device- t h a t

was t o prevent those who would shave a l i t t l e o f f o f every c o i n - c o l l e c t i n g a

p i l e o f scra p metal. This gave r i s e t o banks i s s u i n g notes to a t f i r s t guarantee

the payment i n t h e proper amount o f prec ious metals o f gocd currency meaning

undipped coinage.

However, the gr ea te st problem wi th the Gold, Standard was th e i n a b i l i t y t o

c r e a t e money other than war, a l t e r i n g contents, o r changing t h e r a t i o o f s i l v e r

t o gold as th e s i l v e r Democrats t r i e d i n t h e l a t e 1300s. The money supply was

i n the hands o f nature and thus was subject t o boom and bust c y c l e s based a l s o

upon t h e discovery o f metal. The C a l i f o r n i a Gold. Rush o f 1849 c o n t r i b u t e d to th e

economic boom that l e d to the Panic o f 1957.

The disadvantage of th e Gold Standard was t h e i n a b i l i t y t o create a steady

new supply o f money t o keep pace with the growth i n population and economic

T4


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needs. Going back to the Gold Standard i s not the answer to long-term economic

growth nor would i t solv e the curre nt economic c r i s i s . I n f a c t , i t would c r e a t e

an economic c o n t r a c t i o n t h a t would en d f l e x i b i l i t y t o even deal wi th the problem.

Th is i s separ ate and d i s t i n c t in so fa r as gold pro vid ing a pr iv at e source of

-wealththat-remains ar st or e of -v al ue . The reason-gold1

emeriged-as-iiioney-because i t

was a va lu ed commodity and recogniza ble i n a l l lands. They use gol d fo r jewe lry

i n In di a and China the same way they use i t i n Ru ss ia , Europe, or the Americas.

I t i s a scarce commodity that there would not be .enough of i f every per scn i n theworld wanted j u s t 1 ounce f o r themselves, whether or not gold i s the " o f f i c i a l "

monetary un it or the check a g a i n s t f i s c a l i r r e s p o n s i b i l i t y i s of no importance.

In the s p i r i t of l i b e r t y , all owi ng gold to ranairi as the pr iv at e st or e of wealth

i s f a r b e t t e r . That was the ver y is su e th at Roo sev elt sought to el im in at e - th e

a b i l i t y t o hoard gold as a hedge a g a i n s t government. Th is i s a ls o why Rooseve lt

c o n f i s c a t e d gold so he could devalue the d o l l a r r e l a t i v e t o go ld thereby any such

p r o f i t would de fa ul t to the government - not the i n d i v i d u a l hoardin g the go ld .

A l l the problems with the Gold Standard emerged- from the i n a b i l i t y to

c r e a t e money when needed. M i l t o n argued that the d e f i c i t spending advocated by

Keynes would lead to only i n f l a t i o n r a t h e r than econcmic growth. Ineed, Keynes

him sel f d i d not advocate p e r p e t u a l d e f i c i t spending year a f t e r year. Once the

government rece ive d hi s ble ssi ng, they j u s t ran with the b a l l , but the go al-p ost

was past decades ago. Looking a t the Fede ra l budget si nc e 1 936, th e onl y yea rs

i n which th er e was n ot a d e f i c i t were f a r and few between:

7947, 7948, 1949, 195 ], 1956, 1957, 1960, 1969, 1998, 1999, 2000, 2001

During the 72 years between 1936 and 2008, there were only 11 years that pro

duced a budget surp lus. This i s not a very good r e c o r d f o r Keynesian economics.

Once the concept o f d e f i c i t spending was i nt ro du ce d by Keynes, i t was s e r i o u s l y

abused. But the problem was not so much the d e f i c i t , but the f a c t that at the same

time th er e was the pretens e of ma in tai ni ng a Gold Standard a t a f i x e d quantity of

d o l l a r s to an ounce of gold while the supply of d o l l a r s was being in cr ea se d and

the go ld supp ly was d ec l in in g . Th is culirdnated i n the f i r s t break with the two-tier

Gold Standard whereas g o l d began to tr ad e on the London exchanges f r e e l y , that was

fol low ed by the cl os in g of the gol d window i n 1971 when there- were more c o l l a r s

than gold to redeem them. The r e a l i t y of perpetual d e f i c i t spending under the Gold

Standard came home wi th shocking fo rc e.

The Bottom Lin e .

A r b i t r a r y spending even on i n f r a s t r u c t u r e w i l l do noth ing but create p erce ived

i n f l a t i o n b e fo r e i t even h i t s the economy. The work programs of the Great Depression

made sense o n l y because there was a na tu ra l di sa st er i n the form of the Dust Bowl

tha t las te d 7 years. I t i s tru e tha t unemployment rose to 25%. However, i t was only

8.9% i n 1930 deep i n t o the s t a r t of the Depres sion. I t reached above 20% only when

the Dust Bcwl destroy ed jobs gi ve n we were s t i l l 40% a gr ar ia n i n our work f o r c e ,unemployment began to declin e wit h 1935:20.3%, 1936 16.9%, 1937 14.3%, 1938

19% and 1939 17.2%, but as you can see, we have a s e l e c t e d memory f o r what r e a l l y

worked and what did not. Unemployment i n 1940 st oo d a t 14.6% and at th e end o f

World War I I , i t was 1,9%. I t was no t th e WPA t h a t changed the economy, i t was the

war. T hi s has l e d to some c l a i m i n g a l s o ' s e l e c t i v e l y th at war i s good fo r the economy

We began the f i r s t peacetime d r a f t i n 1940 th at was approved on September 14, 1940

but i t was Pe ar l Harbor on December 7th , 1941 t h a t o f f i c i a l l y st ar te d the war fo r

Americans then dec lar ed war aga ins t Japan on December 8th followed by a de cl ar at io n

a g a i n s t Germany an d I t a l y on December 11 t h, 1 941.

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I

The WPA was i n s t i t u t e d May 6th , 1935. I t pr ovi ded a v i t a l r o l e i n c r e a t i n g

jobs not l o s t by the credit c r i s i s i n the f i n a n c i a l markets, hut by the Dust

Bowl. The c o l l a p s e of the Austrian Credit -Ans talt i n Hay 1.931, began a c r e d i t

c r i s i s contagion that swept the world cr eat in g a wave of business f a i l u r e s as we

are seeing tcday with General"Motors, unemployment was the worst i n Germany h i t t i n g

5.5 m-niinn in-1932.-lAiie.Britein^wasn_2._7 m i l l i o n . These were the conditions that

not merely l e d t o t h e e l e c t i o n of Roosevelt i n 1933, but Adolf H i t l e r a l s o i n 1933,

From the September sanction o f Germany i n 1936 by B r i t a i n and France, i twas but

o n l y about 3.141 years l a t e r t o P e a r l Harbor. The US had d e c l a r ed I t s n e u t r a l i t yi n Europe on September 5th, 1939 when Germany invaded Poland. Tt wes the war and

not our p a r t i c i p a t i o n t h at ended the depression, but we became the arms and food

dealers for Europe. By th e end of the war, t he US stood with 76% of world gold

reserves. That created. American wealth - n o t p o l i c y o r even; peacetime trade,

Tcday, i fwe wage war, we spend our resources and th e economy declines much

as what took place i n Europe. Wax i s good for the economy, only when you are the _

a j f c d e a l e r , not the aggressor. Today, the work force i s near ly 150 million. I f

we subtract the a g r i c u l t u r a l sector from the Great Depression, unemployment h i t

a t about 10%. Since 1995, the US unemployment r a t e i s between 41-6%. But t h i s

i s a l s o no t a f a i r view of the economy. As of 2005, f e d e r a l government c i v i l

employment i s about 2.7 m i l l i o n . The m i l i t a r y .personnel i s about 500,000 (Army),

54,000 (Navy), 353,000 (A ir Force, and 20,000 (Marines) w i t h about 41,000 (CoastGuard). This brings the f e d e r a l government consumption of labor t o about 3.7 m i l l i o n

o r about 2.4% of the c i v i l work f o r c e . Outside the Great Depression, the worst

bout o f uneH^loyment came i n 1975 when i t h i t 8.5% and di d not drop below 7% u n t i l

1987, The peak during the economic d e c l i n e between 1950 and 1935 took place i n

1985 atabout7.2%. We d i d see 7.5% f o r 1992 that led t o a b r i e f popular movement

f o r Ross Perot and t h e v i c t o r y o f B i l l C l i n t o n i n t he P r e s i d e n t i a l e l e c t i o n s . To

reach 25% tcday, we would see sweeping p o l i t i c a l changes and massive p o l i t i c a l

unrest. I t would be impos sible without the co ll ap se o f s t a t e and l o c a l governments

s i n c e we se e t h a t a g r i c u l t u r e accounts only for about 3% c u r r e n t l y .

The DS Gross Domestic Product ("OJP"i i s now about S15 t r i l l i o n annually. I f

we assume the high Hrfa o f a budget f o r one year w i l l be $3 t r i l l i o n , the t o t a l

f e d e r a l t a x c o l l e c t e d stands a t about 17% of the GDP, Tf we spent that same amounto f money on i n f r a s t r u c t u r e , by the time that f i l t e r s into the economy, t h e e f f e c t

would be t o c l i t t l e - t o o - l a t e . We would need another l a y e r of oversight and costs

t o even administer such a p r o j e c t . I f we simply elimi nat e the fed era l tax c o l l e c t i o n

t h a t would be an immediate shot i n the arm. But t h i s too would f a l l short unless

the people see t h i s as a permanent reduction. Companies would not r e l o c a t e f o r a

mere one-off reduction. What we need i s a three-punch s o l u t i o n .

We already know t h a t i n t e r e s t r a t e s and wholesale increases i n the money supply

w i l l no t be l i m i t e d i n scope to the domestic economy, whatever we do t o r e l i e v e the

economic pressure (lower in te re st rates - o r - increa se spending), i s more l i k e l y t o

Cause f o r e i g n c a p i t a l t o f l e e . This w i l l fur the r con tra ct the domestic money supply

and would most l i k e l y prolong the economic depression.

We must consider what seems t o be the most r a d i c a l s o l u t i o n , but i n 21st Century

economics i n s t e a d o f 16th Century, i t i s f a r more targeted and p r a c t i c a l . I f we

e l i m i n a t e the f e d e r a l income tax and stop the borrowing, we can jump s t a r t the

economy and provide that boost t o confid ence th at the permanent tax cut did i n

1964 compared t o the unsuc cess ful one-off ta x cut s th at went more t o increase

savings than srending.

Ws cannot lose sight of the fa ct that the fede ra l government i s now a l s o

ccmpeting fo r tax dol la rs against the states and c i t i e s who are now i n t r o u b l e


17/19

and cannot create money as th e f e d e r a l government ca n do. Unless we now consider

a 21st Century d e f i n i t i o n & s o l u t i o n , then t h e 18'th Century t h e o r i e s w i l l cover

the speculative losses fo r investment banks, not Wall Street, and create only work

programs for stock brokers and programmers t o l e a r n how t o f i x b r i d g e s and roads.

That seems one way t o lower s k i l l s opposite o f the p o l i c y o f the- WPA i n 1935.

i i . I i T i i n a ^ i n g - -Federal-iHeotae-Tax- .

{1) W i l l s i g n a l a permanent and immediate change t o the

p u b l i c res to ri ng "confidence" i n t h e future and w i l l

r e s u l t i n immediate economic r e l i e f .

(2 ) W i l l s h i f t th e ta x t o make domestic labor cheaper

whereby corporations who move o f f s h o r e would then be

subject t o t a r i f f s and excise taxes but not on domestic

l a b o r depending upon what n a t i o n they moved t o .

(3) Eliminate the competition with the .states ft l o c a l

government that w i l l o n l y be p e t i t i o n i n g f o r bailouts

of t h e i r own, f o r as r e a l estate- prices decline,'the t a x base

w i l l implode c r e a t i n g a c c n t r a c t i o n i n revenues f o r c i n g

the states and l o c a l government t o ; l a y o f f workers.

14) El imi na te th * high cost s o f c o l l e c t i n g taxes we do notneed due t o the e v o l u t i o n o f what we define as money.

[5) E l i m i n a t e the cost and delay i n creating a new adrriinistration. to

oversee some s o r t o f program t h a t would take years t o a c t u a l l y

produce any economic e f f e c t , whereas simply returning what was

received i n income taxes [not s o c i a l s e c u r i t y ) i s a c l e a n way t o

jump-start the economy - immediately!

a.) To those who w i l l argue Marx's philosophy that t h e

r i c h w i l l get more, w e l l they als o paid more, and

i t i s the concentration o f c a p i t a l that creates t h e

pool o f funds t h a t banks then lend that w i l l e l i m i n a t e

t h e c r e d i t crunch. I f someone has $1 b i l l i o n i n cash

and he i s now e n t i c e d t o deposit i t with a bank becausewe a l i o w i l l e l i m i n a t e the $100,000 FDIC l i m i t a t i o n

that prevents b i g money from being lent ou t and merely

i n s u r e a l l d e p o si t s because we i n s t a l l b e t t e r r e g u l a t i o n

t o prevent gaps with unprecedented leverage, then we

should have no problem securing a l l deposits, that w i l l

suddenly a t t r a c t - a c i t a l from around the world as w e l l .

This w i l l b e n e f i t t h e average wage earrer and stop the

Marxism that caused both Russia and China t o see th e l i g h t

t h a t we remain b l i n d , p r e f e r r i n g t o l i v e i n t h e dark.

(1) FDR confiscated gold so he c o u l d devalue t h e d o l l a r . This was

l i m i t e d t o the times because we were s t i l l on a Gold Standard.

By monetizing t h e debt, we would hot create a dramatic change

i n i n f l a t i o n because i n t h e r e a l world, when we i s s u e bonds,

we may not define that as "money" i n terms of M1, b ut i n th e

p r a c t i c a l perspective, we look a t how much we owe and judge that

as money issued regardless o f what we c a l l i t .

(2) Between 1986 and 2006, the in te re st exrenditures t o keep the debt

i n place accounted f o r almost 72% of t he increase i n t h e debt. We

are funding our mortgage w i t h a v i s a c a r d .

I I . J Eliminate t h e N a t i o n a l Debt By Monetizatign

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18/19

(3) Those who be li ev e tha t t h i s would be i n f l a t i o n a r y are just

misguided for the marketplace already sees the same amount

of do l la rs held as assets i n the form o f bonds and replacing

t h a t same amount w i t h d o l l a r s w i l l save as we have seen 72%

of the ov er al l growth i n debt th at we c oul d never repay i n

_any event, and no government a c t u a l l y b e l i e v es they w i l l i n

f a c t pay o ff the ir' deb t fo r that would be a contraction of

money supply unprecedented to date.

;A) E li mi na ti ng the Insurance L i m i t a t i o n a t t he FDIC

(1 ) There i s no reason why we should not. ins ure a l l dep osi ts i n

commercial banks, f o r t h i s would replace government debt

and make vast sources o f cash av ai la bl e fo r lending and would

e l i m i n a t e t h e c r e d i t crunch overnight.

(2) I f we in sure a l l commercial bank d e p o s i t s , t h i s w i l l a l s o

a t t r a c t f o r e i g n c a p i t a l increasing the c a p i t a l reserves for

lending.

(3) Investment Banks should be excluded f o r they are higher r i s k

and not pa rt of the " r e a l " ccmnerical network with l o c a l

branches that ser vi ce the community. Those who wish to dealwith such banks should a ls o su ff er the higher r i s k for higher

y i e l d

a. ) There must be a si ng le regul atory body with no gaps i n the

r e g u l a t i o n where the greatest danger has h i s t o r i c a l l y been

the leverage.

b. ) There must be transparency and only openly regulated exchanges

where counter-parties must have the asset to support the

p o s i t i o n , not mere r e p u t a t i o n .

(B) S oc ia l Secur ity Reform

{1) By el im in at in g the borrowing and tax at ion at the fe de ra l l e v e l

considering the income t a x ( d i r e c t t a x a t i o n ) , t h i s w i l l a l s o

a u t o m a t i c a l l y r e h a b i l i t a t e the s o c i a l S e c u r i t y program and make

t h i s i n t o a r e a l savings pla n tha t:

would then Invest the funds

becoming a n a t i o n a l wealth fund to also enable i t to face the

entitlements coming sooner than l a t e r where the pu bl ic als o have

l o s t f a i t h i n ever seeing a r e a l d o l l a r .

(2) Once f r e e d from t h e investment i n government bonds, t h i s fund

can create tremendous economic progress fo r the fut ur e by even

a l l o c a t i n g 3% f o r venture c a p i t a l i n si za bl e new innovations

t h a t w i l l g r e a t l y advance medicine, sc ie nce , and technolog y.

I I I . ) N a t i o n a l Health-Care Program

(1) We need to es ta bl is h a nat ion al health-care program f o r a l l

t h a t w i l l re li ev e the coning c r i s i s i n pension funds o f c i t i e s , ,

s t a t e s , f e d e r a l government, and corporate America. The costs are

so steep, even ser vic e jobs are leavi ng fo r a sal ar ie d employee

c o s t i n g $50,000, ends up cos ti ng on average $125,000 between taxes

and health-care along with pension c o s t s .

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19/19

I

(2) we must face the f a c t s , t h a t the purpose o f s o c i e t y i s t he

cooperative e f f o r t s of s o c i e t y t o seek lower co st s and

s e c u r i t y , no t much d i f f e r e n t why people were w i l l i n g t o be

a s e r f so that when danger camer they got to r un behind the

w a l l of the c a s t l e .

(3) A n a t i o n a l heath-care program i s v i t a l t o our s u r v i v a l f o r

the costs are r i s i n g so r a p i d l y , corporates a r e passing those

c o s t s on t o employees and the q u a l i t y o f l i f e i s c o l l a p s i n g .

(4) Ate must stop the nonsense, pass t o r t - r e f o r m , stop the craay

l a w s u i t s , and the costs w i l l ccme back i n l i n e t o where they

once were 20 years ago when small companies handed out h e a l t h

care that covered the whole f a m i l y o f every worker. The lawyers

w i l l f i n d another area t o e x p l o i t , o r perhaps they too have to

t i g h t e n t h e i r b e l t f o r the good of t h e nation before we don't

have one anymore.

(5) E l i m i n a t e trade b a r r i e r s t o cheaper drugs from Canada and force

them back i n lin as w e l l . This i s our f u t u r e we are t a l k i n g

about, we have seen what the investment bankers did t o the

economy with t h e i r outrageous leverage and unregulated shadow

markets,L

l e t us not wait u n t i l h o s p i t a l s c l o s e because peoplecan no longer a f f o r d health-care.

(6) We need urgent a t t e n t i o n f o r as unemployment r i s e s , c h i l d r e n

w i l l new die fo r the "greed" o f t h i s ; industry i s destroying

the very t h i n g they c l a i m to be p r o t e c t i n g .

6 U HW AT T O N

This three-punch s o l u t i o n i s c r i t i c a l to our s u r v i v a l . We must respect t h a t

there a r e j u s t sometiroes i n h i s t o r y that we have a choice t omake a r e a l e f f o r t

t o change t h e trend, or t o b u l l s h i t our way around the f a c t s only to. postpone the

r e a l i t y , wo one expects t h e n a t i o n a l debt t o ever be p a i d . We can continue t o l i v e

i n our 18th Century world and pretend t h a t i f we p r i n t t h e money i t w i l l be some

how more i n f l a t i o n a r y than p r i n t i n g bonds and spending 72% more t o keep them going

when there i s no plan t o ever r e t i r e than anyway.

I t i s time t o create a c o n t r o l bum before we explode from our own nonsense.

I t i s not t o l a t e t o save th e day. Put we have t o s t a r t t o make r e a l i s t i c plans

and address the honest i s s u e s . The investment Bankers have blown-up t h e i r world

as they always do. They have never got it r i g h t even once! They create models t h a t

ignore the b i g events because they thought they don't happen that o f t e n . Well i t

happened and now they a r e begging t o cover t h e i r l o s s e s . Healthcare and the wave

of entitlements i s going t o h i t shore lik a tsunami. Ar e we going t o j u s t once

plan f o r th e f u t u r e , o r i s democracy the worst k i n d of government because there

i s t o o much t a l k and no action?

!

J u s t f o r i o n c e , l e t use update our d e f i n i t i o n o f what i s money and we w i l l see

t h a t p r i n t i n g ! d o l l a r s o r bonds i s r e a l l y the same t h i n g except bonds ar e the g i f t

t h a t we keep having t o pay fo r generation a f t e r generation. End the s t u p i d borrowing,

We are not i n dz anymore. Gold i s no t money. Le t u s ' s t a r t understanding the modern

world we l t v e l i o today.

Martin A. Armstrong

Armstro ngEcon omics^G ^ll. ccm

T9

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2008 11 08 New-Practical-Laws