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Daily Archives: 8 February 2013

Hi all,

Some of you may recall that the CFR made a proposal for a “Global Trust” quite similar, at least in spirit, to the Public Trust of General Federalism a few months ago. The CFR is now driving this proposal, Memorandum 26, once again on their website with another article on it. I couldn’t resist and had to respond. The article is entitled “A Global Trust for Rule of Law” by Mark P. Lagon, Adjunct Senior Fellow for Human Rights, and it can be found here.

The article begins:

The rule of law is critical for people to have a meaningful opportunity to thrive. Still, for billions of people around the world today, the rule of law exists on paper but not in practice.

Yep, and the United States is the “Shining City on a Hill” that exemplifies that hypocrisy. Hypocrisy is symptomatic of moral hazards. Please put that thought on the shelf as you read on to my discussion of moral hazards in what follows.

Even though a theme for the United Nations General Assembly High-Level Panel in fall 2012 is rule of law, various UN programs devoted to rule of law have not had a transformative impact.

Well, perhaps someone should clue them in on what that means before they deliberate on it too much.

Traditional intergovernmental institutions will never offer enough to achieve systemic change. To supplement them and achieve what they alone cannot, the United States should take the lead to forge a more nimble partnership with public, private, and nonprofit sectors and establish a Global Trust for Rule of Law (“Global Trust”). Similar to the Global Fund to Fight AIDS, Tuberculosis and Malaria (“Global Fund”), a diverse board of donor states, philanthropists, rule of law experts, and civil society representatives would run this Global Trust. Its purpose would be to build developing nations’ capacity to implement rule of law and unleash the potential of marginalized groups worldwide, promoting not only human dignity but, crucially, global economic growth.

The basic idea sounds great, but I’d only suggest that you need to know what rule of law is before you try to create an entity or network purposed to support it.

The Problem

“Rule of law” consists of procedures giving all people in a society meaningful access to justice, unimpeded by corruption or discrimination.

Well, that’s your opinion. Many thousands would disagree. “Rule of Law” is more fundamental than the things you are speaking of. When a society abides rule of law it simply means that the societal norms (usually expressed in statutory laws and the exercise of equity in law) are/is uniform and predictable. It doesn’t mean all that other fluffy stuff. If you want to talk about those fluffies you need a different term for that.

In fact, this is precisely how the United States has managed to avoid, avert and prevaricate on all matters dealing with genuine rule of law because, frankly, the United States is bankrupt when it comes to any semblance of it. How is this, you ask? Well, perhaps I might be alluding to any of the bulleted items below which represent a mere fraction of the ways in which the United States has betrayed rule of law? Could it be example item 1? Or perhaps it is 2? Could 6 be the example of rule of law you were thinking of?  Perhaps you were thinking of 14, or 15? The United States has no moral currency to spend on a Global Trust, imo. Yes, all things are relative and in several examples the U.S. could be considered a leader. And that’s scary:

  1. Attorneys in the United States routinely gather privately and discuss cases, then decide on a “deal” they will present to the judge, making the hearing itself a show trial. While this is not supposed to happen, because the judge and attorneys all know the identity of each other, this becomes possible, and human nature demonstrates it is inevitable. This constitutes an end run around Rule of Law. General Federalism ends this practice by invoking double-blind standards – something never proposed before. Failure to institute double-blind standards is an act of omission in creating moral hazards. Notice that this issue is structural.
  2. Just a few years ago the United States experienced what became known as the mortgage crisis. Here is what really happened. Banks divided their mortgages into groups based on risk. For example, those most likely to default might be in group 1. Those least likely to default might be placed in the top group, 10. And the risk of default for each group would then increase from 1 to 10. Then, the investment gurus created an investment instrument which was itself composed of several other instruments. Rule of Law requires that when you create an investment vehicle like this you must report the default risk so that credit rating agencies can give the instrument a proper and accurate risk rating. So, a legal entity called MERS was created to buy the deeds for all the mortgages the banks carried, including all the deeds of risk levels 1 through 10 in our illustration. MERS then violated Rule of Law by severing the chain of ownership between the deed and the homeowner and instead re-titling it in the name of a third party investment firm. But the clever fraud here was that the reconnecting of the deed back to its rightful owner was not done before the investment instrument was sold to an investor. Rather, they placed all the deeds in what are called tranches created by the investment firms; basically a bunch of buckets in which to place and categorize the deeds by risk, in our illustration being 10. Normally, the tenth tranche would be the lowest risk bucket and would have the highest credit rating, thus making its market value higher than the higher risk buckets. But when they put the deeds into the buckets they just dumped all of them in, by illustration, bucket 10 and left all the others empty. This put 10 buckets worth of instruments in a single, highest-valued bucket, or tranche. Of course, the rating agencies rated all of them with their highest rating, “AAA”. Now, they could begin selling these deeds, which by this time were converted into investment instruments whose value was backed by the deeds, at a premium price. But that also meant they could sell very high risk deeds at a premium price also. Only once a mortgage actually defaulted did they then move the deed from tranche 10 back to tranche 9 or some other lower bucket. This circumvented the very meaning of speculation and risk as they were not operating with risk, as they were purporting to do, but were acting out of virtual certainty. Thus, once a mortgage defaulted it was quickly placed into a riskier tranche and the ownership trail of the deed was “reconnected” by ‘robo-signers’ (people who signed deeds in order to transfer them, which, done in that way was illegal anyway) back to the actual investment vehicle that got moved to the riskier tranche. This is blatant fraud and was never resolved by any legal authority. It was a multi-trillion dollar theft that was never prosecuted. Nor were the actions Rule of Law required to remedy this problem undertaken. It was a blatant violation of Rule of Law. This event in particular, shows how deeply corporate interests can and have influenced government to the point of suborning Rule of Law.  The entire affair involved approximately 48 million home mortgages. Western, neo-liberal “democracy” has clearly demonstrated an inability to prevent the suborning of Rule of Law by the oligarchy and any global governance scheme will have to have a mechanism that reliably prevents this.
  3. Judges in the United States are an “Officer De Jure”, which is interpreted to mean that their Orders can violate the law (a friend at the ACLU told me this and I have seen it myself). Further, instead of using the principles of “equity in law” as they are supposed to, they take it to mean they can rule anything consistent with their personal opinion. That is not what equity in law means. Thus, Rule of Law is subverted. General Federalism provides remedy for this and requires Judges to state their logic and reasons in every ruling. Giving absurdly corrupting powers to Judges is an act of commission in creating moral hazards. Notice that this issue is structural
  4. Multilateralism exercised by numerous countries means that unelected officials are making decisions that affect their constituents in ways that their own fundamental laws intended to be made through legislation. This is not only a blatant subversion of Rule of Law but it is a complete suspension of it. Notice that this issue is structural
  5. In the United States, the science of public relations is so honed that any candidate with sufficient funds can win an election and the very fact that voters hear so little of other candidates makes their efficacy in that office appear inadequate to the voter. When two candidates spend roughly equal amounts of money on a campaign, the result is a razor-thin election. If one follows the campaign money, it is clear that money, at least in the last thirty years, is what wins elections. Consequently, the faction of oligarchy now controls all elections. Thus elections are de facto no longer of equal suffrage and are rigged. As equal suffrage is a requirement made in the U.S. Constitution, this is a violation of Rule of Law. Constitutionally permitting the private funding of campaigns is an act of omission in creating moral hazards. Notice that this issue is structural
  6. It would under any other circumstances be a laughable fact that bribery and corruption are generally understood only in certain contexts even though their definition applies in contexts the general public, for some reason, seems to conveniently overlook. In other words, bribery and corruption goes on openly and blatantly on K street and the public never seems to notice it. What we are referring to is the idea of “special interests” and government lobbying. Of course this is blatant bribery and corruption, but the way in which those terms have been understood has been twisted and perverted to make it appear that only someone who is not a “reputable” politician could do something like that. Thus, the entire federal government of the United States is thoroughly corrupt as they take favors (or “emoluments”) from factions (campaign money) in exchange for favourable consideration in Congress of the faction’s perspective or agenda. It is blatantly obvious and is a wholesale rejection of Rule of Law. Yet, the United States lectures the world about “rule of law”. It is astounding. Constitutionally permitting the private funding of campaigns is an act of omission in creating moral hazards. Notice that this issue is structural
  7. Since the Patriot Act, the United States now can incarcerate anyone without a trial indefinitely. This is not ideological hyperbole but, as I have found in my research, literally correct. This is another wholesale suspension of Rule of Law. This is a matter of ingrained public policy.
  8. Federal judges in the United States routinely (to the point of being almost a certain, guaranteed fact) dismiss cases bearing heavily on matters of the United States Constitution simply because it is policy to not hear such cases. This policy (yes, courts also issue “policies”, or standing rules, throughout the courts that other courts are obliged to obey. This is not to be confused with precedent or case law, but is an explicit policy set by senior courts) must be followed by all courts. For example, if someone’s 14th Amendment rights are blatantly violated – say the custody of their natural child is completely revoked without service of process or a hearing beforehand, indeed, even without their knowledge at all – in an open and shut case for which even the opposing party agrees is true, and if it involves subject matter such as domestic relations; the courts will almost certainly dismiss it, even though they are required to hear it because it hinges on a clear federal matter (the Supreme Court has set case law – which is overridden by policy by the way – that if a hearing is held within thirty days after the revocation then it is not a violation of the 14th Amendment. But I am personally aware of numerous cases where a hearing was not held for many months afterward). When a State fails to perfect any of the valid methods of service of process (whether by direct service through a law enforcement officer, a valid process server, or by a waiver procedure) and revokes a fundamental liberty right (such as one’s access to their natural child) this is cause for a hearing by a jury in federal court. The examples are endless, even affecting Jesse Ventura when he tried to obtain a federal jury in a politicized matter having to do with U.S. airport security practices. Federal courts have turned the art of finding ways to dismiss cases well before a jury can hear them into a masterpiece displaying an impressive level of sophistication and effect. It is obvious from the sheer volume of cases whose matters are highly politicized, and the manner in which they are routinely dismissed in favour of the more powerful political position at that time and place, that corruption is occurring in that communication with the judges outside Court and without the other party (ex parte) is occurring (speaking of volume, please also note that courts have since their earliest days steadfastly refused the collection of non-identifying statistical data on the outcome of cases, precisely because it will prove what we are saying here). And we shouldn’t be surprised at this since it is human nature to corrupt power. The only way to stop this is to enforce double-blind procedures in all courts, a key innovation made feasible in all its seeming complexity under General Federalism. And all of this matters, regardless of how much of a “technicality” we want to think of it as, because these technicalities go to the heart of Rule of Law. When following Rule of Law, every technicality is followed as that is the very essence of what Rule of Law means: You follow the rules. But lets not kid ourselves. The things we are talking about here could hardly be called technicalities. These are wholesale revocations of Rule of Law in which a wealthy, powerful individual can get any ruling they want. It’s a complete disaster and farce. This is why we call neo-liberal western democracy a lie. The constitutional elision of some form of jury representation in the appellate courts, lack of double-blind standards and a lack of requiring scientific rigor for probative force are all acts of omission in creating moral hazards. Notice that this issue is structural.
  9. Courts in the United States have the power to issue two flavors of something called “contempt” of the Court. The two flavors are criminal and civil. Here, yet another back door to circumvent rule of law is structurally built-in because should a judge issue a contempt order, either civil or criminal, a person named therein to be arrested can be arrested without any stated cause, without any reading of rights and can thence be placed in jail until the person pays whatever fees the judge wishes to demand in the contempt Order. Notice that several rules of law we generally take for granted are being violated here. This is a tool of choice when dealing with any “normal” person who has a slam dunk legal case against an oligarch and who just won’t go away. By assessing attorney’s fees, expenses or other required remediation costs that are, of course, all trumped up, a judge can Order the paying of massive fines that no “normal” individual could possibly pay. This allows the judge to jail this person for many, many months. I cannot speak for every State of the United States but I can tell you that in the State of Georgia this is more than just routine. People sit in jails in Georgia for several months on account of an inability to pay a fine set by a judge. And they obviously cannot pay it if they are sitting in jail because, for one thing, they would pay it in order to get out, secondly, they cannot do anything in jail as far as paying anything or even coordinating the payment of fines and third, they cannot pay themselves (that’s the rule imposed), so someone else has to do it in their stead. We’re not talking about bail here. Speaking of which, these cases offer no bail option at all. Again, the purpose of this provision, like the Officer De Jure nonsense, is to give Judges the power to circumvent rule of law when oligarchy is in a bad way and a case is heavily stacked against them. General Federalism eliminates this moral hazard by requiring that no one can be jailed on the basis of any debt or fee by itself. The granting of legal powers that are excessive and resilient to accountability is an act of commission in creating moral hazards. Notice that this issue is structural.
  10. Absolute immunity of judges has been grossly abused, in many cases by State legislatures themselves. In the State of Georgia, the legislature there pulled a clever trick to circumvent rule of law: they passed a law that allowed Courts to hold hearings in which a person’s rights were revoked or disfurnished without telling that party that a hearing was being held (an ex parte ruling) – but unlike the Supreme Court’s ruling stated – said nothing about how long one could do this without a hearing with the affected party present. This meant that if the judge issued a ruling and did not hold a hearing within thirty days, he (or she) was in violation of the 14th Amendment! But because of his or her absolute immunity, as the Supreme Court has sternly ruled in case law, you can do nothing about it. As we can see as we enumerate all these “secret” tricks it is clear that if the United States government wanted to go down the road of despotism it is already well equipped for it. General Federalism places limits on absolute immunity of judges (it does have a good reason for existence, but limitations can be placed that do not undermine its purpose). The granting of legal powers that are excessive and resilient to accountability is an act of commission in creating moral hazards.  Notice that this issue is structural.
  11. What we see here, as we do in virtually every case in the United States, is a unique strategy for violating Rule of Law. In other places, especially non-western countries, violations of Rule of Law are more overt and open. But in the west trickery and deceit is the name of the game. This unique strategy so thoroughly perfected in the United States is to deliberately create moral hazards for actors in various roles, then use that to circumvent Rule of Law, either by blackmail or by simply relying on their human nature. In creating the moral hazard one does not, necessarily, have to violate Rule of Law themselves. This gives the appearance of a working system of Rule of Law while the true violation occurs behind closed doors in ways not easily observed by the public. It is deceitful and dishonest. Of all the characteristics of General Federalism, this disdain for deceit probably differentiates it from just about every other global governance movement more than any other single characteristic. Notice that this issue is structural.
  12. Slavery is illegal in the United States by Constitutional Amendment. An example of how slavery works might go like this. If I decide to purchase one hundred slaves from some distant location overseas at a price of x per head there is a reason why I’m doing this. I’m doing this because I know that despite what I spend on the slaves, owning them and putting them to work on my plantation will generate far more money that what I spent purchasing them. Of course, that calculus involves some speculation on my part. First, I am speculating that only a small percentage of the slaves I purchase will fail to be productive (some may die, some may not be able to work because of health, etc.). And I know that some will fall into this category. But, if the price per head, x, is right, and the gains I know I’ll get by using even just the remaining healthy slaves is high enough, I know I will profit. So, I am speculating on the future economic performance of a group of 100 human beings. I cannot know for sure which ones will be productive and which ones will not, not by name, but all I need to know is what is the likely percentage of productive individuals in that larger group. So, the future economic performance of any one of the named slaves is speculative. If we switch lenses now we can see that the exact same definition exists with unsecured credit. In this scheme, I give a large sum of money, like I did when I bought slaves, to a purveyor of credit. This purveyor loans this money out to several people, say 100 people. But in doing so they sign an agreement that requires them to pay back my money, plus some amount of interest. I know that, if the interest is high enough, and if I can have a rough idea of how many of those 100 will fail to be productive (and thus fail to repay me), I can adjust that interest rate to insure that I profit from all the other debtors that repay me with interest. In this example, I am speculating on the future economic performance of a group of 100 human beings. However, by making it “voluntary” (a questionable claim we’ll make for the sake of discussion) and by obfuscating it in the world of abstract finance, I am concealing the fact that I have just circumvented Rule of Law by making an illegal activity legal, even though the law never changed. For if the gravamen for making slavery illegal is not that it constitutes speculation on the future economic performance of human beings, how else would you define it in a way that would capture all forms of slavery known at that time? Clearly, this speculation on human performance is the basis of slavery itself. So, slavery has been reintroduced and Rule of Law violated again. Notice that this issue is structural.
  13. In the United States, the right to be protected from unreasonable search and seizure is the law of the land. However, as noted in previous examples, if you take such a case to the federal courts it will almost certainly be dismissed. And cases running rampant across the United States are frauds such as storming into private residences where a warrant, also by law of the land, is required before entry. Simply “having” the warrant, or the warrant being in “existence” at the time of the intrusion is a mockery of the meaning of the law. Without allowing the residents an opportunity to validate the authenticity of the action, the intruders are trespassing, plain and simple. But the Rule of Law protecting one from “unreasonable” invasions in which the resident has no knowledge of the required “oath or affirmation” (warrant) is circumvented by existing practice and the federal courts refusal to hear such cases. It is true that occasionally federal Courts will hear cases like this, but only when it is brought by oligarchy or its agents and only to placate growing public anger and sentiment. The vast majority of cases of this nature are dismissed out of hand. General Federalism puts an end to this moral hazard by simply denying the right to enter any place serving as a private abode at all. There are exceptions, but that is the gist of it. Notice that this issue is structural.
  14. If any agent of government notifies or informs a Citizen that a given set of Rules of Law exist when they do not, or states that a given set of Rules of Law that do exist do not or if they simply misrepresent existing Rules of Law, then under General Federalism the agent would be considered to be violating Rule of Law. This is because, by dint of the agent’s authority as a lawful delegate of government, they compel the Citizen to behaviour outside the actual Rules of law. And if you cause someone to violate the law you are violating the law. Sadly, this happens on a routine basis every day in the United States, usually being perpetrated by law enforcement officers. Notice that this issue is structural.
  15. Advertising in the United States has clearly crossed the line into blatant fraud and virtually every American can easily see that fact. For example, when a software company collects your financial information to sign up for software as a service, then tricks the unwitting computer user to respond to an advertisement for a different product or service in which it isn’t clear to the buyer (which is what matters) that it is in fact an ad or that they’ve consented to a purchase, and the advertiser charges them for that purchase using the financial information already collected, it is clear and blatant fraud. Once again, because the Courts are structured with so many “ejection seats” to get them out of cases like this, they can either rule in favor of oligarchy or just dismiss the case entirely. Seldom will one ever get to an actual jury. General Federalism includes a specific Constitutional provision to stop this practice. The constitutional elision of principles of justice in economics is an act of omission in creating moral hazards. Notice that this issue is structural.
  16. One of the areas most rife with corruption in the Courts of the United States is the area of domestic relations. Here, the federal government pays States a proportionate amount of money for the amount of child support they order. In other words, the States are getting kickbacks from the federal government to order child support. The problem however, is that this compels judges, the same people making determinations of child custody, to give almost all custody rights to just one parent, not divide it equally. The overwhelming consensus in the psychological profession is that joint, down the middle custody of children is by far in their better interests. This kickback came about as a result of special interests lobbying for it and created a moral hazard for judges when making determinations of child custody. Judges simply revoke almost all custody from whichever parent the constituent community will least be in uproar about. And there is the final cause of this moral hazard: judges in most districts and circuits are elected directly by the residents of that area. But the same problem of special interests comes into play and judges are put in office by those with the deepest campaign pockets; the oligarchy. And that is why judges always use these tricks and “escape hatches” to circumvent Rule of Law and please their masters. General Federalism forbids this practice by having Judges nominated by equal suffrage and a candidate then appointed from that selection. The Failures to protect individual liberties are acts of both commission and omission in creating moral hazards. Notice that this issue is structural.
  17. Both State and federal Statute in the United States is a bloated tome of years of legislation piled on top of itself. The inevitable result of this is that, eventually, blatant contradictions and internal inconsistencies in the law appear. It is a verifiable fact that about 25,000 new laws are passed in the United States every year. It is truly astonishing to find that in most bodies of Statute, to include United States Code, for every law found one can find another law somewhere else in that corpus that blatantly contradicts it. This again creates a moral hazard by allowing Judges to simply pick whichever law they prefer in any given case and apply it, even if they are bothering to read the law in the first place (usually they just rule on their personal opinion). This is another wholesale corruption of Rule of Law. General Federalism addresses this by requiring Courts to identify contradictory, internally inconsistent and/or redundant law, declare all of them unconstitutional where codified together as such and only then reach a ruling in the case presenting. And they must do this in every case heard, virtually guaranteeing that contradictory law doesn’t live long in Statute. Failure to constitutionally require Courts to rule on such inconsistencies in every hearing held is an act of omission in creating moral hazards. Notice that this issue is structural.
  18. The United States Congress has passed laws over the years requiring that, in certain politically sensitive cases, original jurisdiction in federal courts shall not begin where it is supposed to and always has before, with the lowest federal Court, the District Court, but rather shall first be heard in the federal Circuit Courts … where no jury is present. This is what happened in the example given of Jesse Ventura. General Federalism ends this practice by first, explicitly denying the government any right to place barriers to anyone seeking to have their case heard by jury and second, by Constitutionally framing the Courts such that all Courts, including appellate Courts, have juries. In western law, an appellate Court is only supposed to evaluate the question of whether or not the lower Court erred in its ruling. It is a decidedly procedural analysis and is the reason why juries were not required. Appellate Courts do not try fact, which speaks directly to merit. They thus don’t really try a case on its merits either. They are simply making a determination of whether or not the lower Court made some procedural mistake. Under General Federalism, the role of the appellate Courts is both to be an arbiter of procedure as well as a limited trier of fact. However, the restriction on trying fact is that the appellate Courts are not empowered to hear or collect new facts unless a lower procedural error prevented its entry there. Thus, under General Federalism appellate courts hear matters of procedure without a jury then under limited conditions hear matters of the merits of that same case with the jury, and the jury’s decision is final. The denial of juror involvement on any level in the appellate system is an act of omission in creating moral hazards. Notice that this issue is structural.
  19. General Federalism holds that the ultimate expression of Rule of Law is to acknowledge in deed that its powers are derived of a population of people who, at the end of the day and as an Individual, had no choice but to consent to the social contract put before them. And therefore, it is a perversion of Rule of Law to then assert any right to “punish”, for punishments sake, an Individual who for whatever reason, declines to abide that social contract. This concept is a bit abstract but when you think about it, the logic is inescapable. If you believe in Rule of Law you cannot simultaneously believe that a provision of the social contract as a rule of laws authorizing punishment can constitute a valid rule for someone who declined to accept it in the first place. It is internally inconsistent and only serves to suborn all Rule of Law. Punishment is a strongly positive action authorized by a social contract. Rule of Law suggests that the minimal act against a dissenter necessary to maintain the social contract amongst the remaining ones that abide is the correct approach. Therefore, under General Federalism, punishment by the state is forbidden and the only act one can take for someone who violates Rule of Law is to physically separate them from your own society. As they had no choice but to accept your social contract, this should be done humanely as they are in your care and your responsibility. So, jails in which people are locked out of their cells all day every day in a commons room with steel chairs and tables, concrete floors and no other place to sit and no activity in which they can engage are deliberate forms of punishment. Under General Federalism, one who violates Rule of Law hazards their right to freedom of movement and association and can be separated from the general population for any length of time. But they cannot be punished for the sake of punishment. It is broadly true that condoning punishment, which is violence, is an act of commission in creating moral hazards.
  20. The sheer volume of legislation that inevitably brews in a system in which the general public’s direct participation in the creation of public policy itself, which we’ve shown is in fact a ruse and a kind of baiting to gain the public’s acquiescence to rule by faction, also tends to result in a massive and colossal corpus of Statute which, by being internally inconsistent and redundant, also tends to breed moral hazards. For example, though it varies amongst the States of the United States, for example, some of those States have produced not only a massive tome of State code, they have created Code that is obviously designed to please faction by offering extreme, outlandishly excessive punishments for the most minor offenses while simultaneously also providing an out of proportion punishment orders of magnitude less severe. This is necessary to placate the factions that got members of their legislature elected by enacting laws with the ridiculous punishments the factions sought, but providing an ejection seat for judges to avoid creating mass public anger and revolt over draconian and abusive laws. This gives judges hearing cases involving these Statutes far too much discretion, a moral hazard, and serves to intimidate the public by misleading them as to what de facto Rule of Law will be applied if they commit such an offense. This, by itself, undermines Rule of Law. But it speaks to a much more serious and deeper problem: a body of Statute with extreme variation in the allowed consequences for conviction results, inherently, in a system that is highly unpredictable to the public. Unpredictable Courts, in yet another way, will then generate and promote moral hazards up to and including moral hazards within the general population: consider what happens in a case in which a person is being treated highly unfairly or has a powerful political opponent that wants to bring him or her harm. Then simply appearing for a court appearance over a simple misdemeanour offense might compel them to violate Rule of Law and deliberately refuse to appear in Court. This happens to go on in the United States on a routine basis, especially in States where these vast differences in allowed punishments exist. In many States, the law may allow for a punishment ranging from 24 hours in jail to two years in jail for the same simple misdemeanour offense. This is a huge moral hazard and makes the Court’s behaviour highly unpredictable to anyone outside that system not familiar with its workings. Notice that this issue is structural.

It is needed not only for people to enjoy basic liberties, but most important to fully tap their capabilities to flourish economically. Consider how much more of an economic miracle India could be if disadvantaged castes enjoyed full access to justice, instead of facing discrimination and even bonded labor. So too would Arab nations be more economically dynamic (and stable)—on a broader foundation than fossil fuel resources—if they did not discriminate against women as workers and entrepreneurs.

“Moreover, establishing a trustworthy, predictable legal context is a magnet for increased foreign investment. For all these reasons, rule of law will galvanize a society’s economic growth.”

It’s good to hear that the author is finally seeing things clearly. What is puzzling is why the author contradicts himself by starting off with this … overly broad definition … of rule of law, then narrows it back down to what he surely knows is the correct definition. Wait … “overly broad definitions” … where have we heard that from before?

Numerous laws and treaties have been adopted guaranteeing rights. Yet developing countries need international help to implement rule of law.

From who? The United States? Are you kidding me?

The world’s preeminent “human rights” institutions do not focus on rule of law. The UN Human Rights Council has only a limited capacity-building mandate, the International Criminal Court (ICC) focuses on accountability after atrocities have been committed, and the European Court of Human Rights does not address the absence of fundamental legal or law enforcement institutions within states. Over forty UN entities working in 110 nations on programs dedicated to rule of law in the past twenty years have not yielded systemic change. Nor have those of the World Bank and other international financial institutions acting alone. Because private sector and civil society assets will never be fully integrated into efforts of traditional institutions beholden to member states and their lowest-common-denominator agendas, a quantum leap in rule of law requires mobilizing other important partners.

Sadly, all of these institutions are victims of the public myth of neo-liberal democracy, so none of them are truly qualified. So, we agree, I’d just add that I don’t think the United States is particularly well-suited for the job either.

Time for a Global Trust

No, it’s time for the United States to get its own house in order first, because we cannot lead the world in our current state.

I could go on and continue to engage the author’s points that follow, but really only a summary is needed since he is merely describing how this scheme would work. The problem, however, is structural and fundamental and no institution or even society that has raped all manner of rule of law in the last thirty-plus years can possibly lead such a proposal. Thus, in principle, I don’t disagree with the author and I am encouraged that someone does seem to appreciate the fact that new ideas are in fact needed. What worries me however, is the lack of ambition and boldness of vision; the continued attempts to repackage a broken system and just apply it another way.

In fact, instead of responding to a set of suggestions that are moot in any case, I’ll just offer a sprinkle of reasons whey bold, new ideas are not just needed but aboslutely necessary before we go on any more “adventures” around the globe:

  1. Unambiguous, empirical data shows that everything tried has failed. “Democracy” doesn’t work at the national level, much less at the global level. To be clear, neo-liberal western democracies always fail and history has proven this. This does not mean, however, that representative government is a failed option. It is the particular neo-liberal construction that is the problem and we will explain that shortly.
  2. Past performance is the best indicator of future performance. When it comes to durability, the wests’ much lauded neo-liberal, western “democracy” is an abject failure. If we were to track all “democracies” that appeared on the global scene since 1960 we’d find the following characteristics:
    1. Of about 120 attempts at democratization half failed by 2010. This constitutes a 50% failure rate per 50 year duration. Given this half-life, essentially all would fail within 300 years. This is a disastrous durability figure that will not suffice for global governance. Keep in mind that the probability of any one democracy making it to the maximum duration of 300 years is exceedingly small. Based on these figures, ceteris paribus, it is more likely than not that a world government formulated as a democracy would fail within 50 years. There are two major problems with this. First, it is obviously too short a duration. Second, a global government cannot fail, for to do so would truly be disastrous, to an extent not equaled at a national level. A successful global government would have to be considerably more sophisticated in this regard.
    2. Those that fail tend to experience rapid economic growth up to their devolution and overall economic hardship does not appear to be a factor. Normally in a free market economy rapid advances in wealth lead to rapid increases in the accretion of power, not just in government, but in society generally. And if that economic advance is too fast, the accretion is exaggerated because the natural process of wealth disaggregating slightly after such an advance does not have time to act. In other words, the ratio of the aggregation of economic power to the disaggregation of economic power, call it ϭ, increases abruptly.
    3. Having said that, income inequality is correlated with the probability of State failure. This would be expected for high values of ϭ.
    4. Accretion of economic power along ethnic lines is correlated with a higher probability of State failure. This also makes sense since ethnic tension would only exacerbate the power accretion.
    5. Economic reforms (trade liberalization and privatization) within the jurisdiction are negatively correlated with the probability of State failure. This follows naturally from the above, since reforms serve to suppress ϭ.
    6. There does not appear to be a correlation between the strength of a State’s Executive authority and the probability of State failure. As far as my own research is concerned, this is the only structural artifact for which data exists. Unfortunately, without complementary structural data we can’t infer much from this.
    7. And finally, what is perhaps the most damning finding for “democracy” is the fact that the degree to which a government is dysfunctional and unable to effectively provide its services is correlated with the probability of State failure. In other words, “democracy” simply collapses in on itself. Whether by corruption, inefficiency, fraud or whatever else, democracies are prone to fail to fulfill their raison d’etre.
    8. The economic realities of ϭ and the correlations above suggest that surges in the accretion of power lead to State failure in “democracies”. But this is exactly what any detractor of “democracy” would expect: the greatest weakness of democracy, according to detractors through history, has been its vulnerability to sudden increases in power accretion within a society. Stare Decesis, this belies a foundational weakness of “democracies” wherein they are especially vulnerable to usurpation, not solely from within the government, but from outside. That is, “democracy” is an abject failure because in its more common form at least, it is a breeding ground of the popular faction Madison and Hamilton warned us about. This isn’t rocket science.
    9. Having said that, the purist could argue that General Federalism does in fact admit of representation in the exercise of legal and economic power because of the ease with which the constituency can revoke those powers, by force if necessary: those that exercise power are influenced (or threatened) by the constituency through the attribute of deterministic annulment.
    10. In summary, it is clear that neo-liberal western “democracy” is not an option for durable, just global governance. But perhaps more worrisome for the call to global governance is how to disabuse westerners of this public myth about “democracy” and “rule of law” that they virtually worship like a god … who doesn’t exist.  Westerners possess neither democracy nor Rule of Law precisely because it doesn’t work under the institutions they’ve created and this is a very good reason for radically new ideas. A good way to start this conversation might be to ask, “which do you value most, the ability to directly participate in governance or that the government that governs is, in your opinion and experience, just?” and “do you prefer to participate in your wife’s life or death surgery or would you rather let a qualified doctor do that instead?” As you can see, the answer should be obvious. The public mythos of direct participation in the execution of governing needs to be debunked publicly.
  3. Due to key structural weaknesses of Madisonian Federalism which I don’t have the space to get into there, the United States has created a vast, “open door policy” in whcih to allow the most powerful oligarchs to dip their hands into the machinery of govenrment and fully corrupt and suborn it. This same “open door policy” that has allowed excessive influence of faction has led to the passage of laws, in modern times as a matter of course, that provide for an excessive and overly broad range of punishment to be applied in their violation. On the one extreme the punishment is draconian and severe and on the other it is more measured and reasonable. This is because faction has lobbied for these draconian, extreme and reactionary laws which, if actually enforced at that extreme, would be destabilizing due to their impact on the population. If enforced at such extremes, population revolts and mass loss of elections of politicians would almost certainly ensue given the severity of these maximum allowed punishments. Therefore, the laws are written to allow the Courts to impose punishments at the other, much more moderate extreme. And this more moderate punishment is the usual punishment the Courts apply. In this way, faction is satisfied and gets the extreme and severe punishment they desire – at least on paper – while politicians are able to pass laws that don’t, by their severe and draconian enforcement, cause them to lose elections in the future. The result of this is a body of statute full of laws that result in a highly unpredictable exercise of power. This is directly counter to the definition of “rule of law” we mentioned previously. By definition, the system is operating well outside Rule of Law; and it is due entirely to the corrosive influence of faction. Very typical examples of this wildly varying range of punishments include the range of punishment provided for what in most States in the United States is referred to as driving under the influence of drugs. One very vocal and publicly visible faction in this debate were the family members of people killed in vehicular accidents involving alcohol. The issue of driving while intoxicated has been a subject of intense lobbying by faction, not just for the obvious safety issues involved, but for all sorts of varied, unjustifiable reasons and has led to laws in some States that allow punishments for first-time offenders that can range from only 24 hours of incarceration to up to two years of incarceration; the exact punishment determined only by the Court. Adding to the unpredictability of the outcome is the fact that the manner in which intoxication can be defined is blurred and rendered ambiguous by the overly broad definition it is given. A person under the “influence” of prescription medication not contraindicated for driving and taken at the prescribed doses could, if the Court chooses to interpret it as such, be considered a drug of illegal “influence”. This sloppy, broadening of definitions of terms has been applied with ubiquity throughout statutes both in State and federal code. The examples are too numerous to list here, but the Patriot Act, for example, has led to definitions of the term “terrorism” that are so broad as to no longer have any meaning. And indeed, the provisions of the Patriot Act, quite predictably, are now being used in cases that manifestly have nothing at all to do with anything that could be construed as terrorism, such as run-of-the-mill prostitution and vagrancy in which even law enforcement admits has nothing to do with terrorism. Like the driving under the influence laws, this means that the application of state power is grossly unpredictable and an offender, even if in reality completely innocent of the crime the law appears to be drafted to address, has no idea what punishment to expect. And we should point out that the definition of Rule of Law as being a standard in which power is applied in a predictable pattern implicitly requires – if it is to make any sense at all – that this predictable pattern be clearly discernible not just to professional attorneys but to virtually any, reasonable lay person. And this consequent unpredictability of intoxication laws is especially true in small, provincial Courts where an offender might be an unpopular figure, such as an atheist, homosexual or other rejected minority who cannot be sure how extreme a Judge is going to rule in their particular case. While it may seem remarkable that Judges would be swayed by this, example after example shows that this is indeed the case and anyone in any kind of minority or unpopular category will be faced with a particularly unpredictable, possibly draconian outcome. Since they are a minority, any outcry of the public for excessive and draconian punishment will not likely materialize. They will simply be quietly sent to jail and forgotten. So, these laws can be both applied in an excessively broad manner and the punishments exacted for them can be excessively broad. And we note the pattern evidenced here which we shall see in so many examples of how laws of this nature produce this two-headed Hydra called moral hazards, in this case for Judges, who can be enabled and empowered to apply process to one individual in a manner completely inconsistent with the process normally considered due any similarly situated individual. Though the highest Court in the United States, the Supreme Court, has repeatedly and clearly ruled in case law for decades that all persons are entitled to the same legal process anyone else so similarly situated is due, this ruling is routinely ignored in the enforcement of these insanely broad laws consisting of equally insanely broad definitions of terms. Indeed, even U.S. officials are beginning to misrepresent the meaning of this long history of case law by suggesting that “due process” is not the same thing as “judicial process”; implying that even those that do not receive any kind of judicial process may still be afforded a “due process” if it involves, for example, the buzz phrase “national security”. Of course, this is blatantly false as case law clearly states that all persons are entitled to the due process any similarly situated individual would normally receive. By simply leaving off the last part of the more well-known condensed form of the Supreme Court’s language of the “due process” phrase, these officials, such as Eric Holder, a U.S. Attorney General, can make these outlandish statements sound reasonable to a lay public. This explanation was used by Holder and others to justify the killing of U.S. citizens by the United States government without any form of judicial process whatsoever, something, by the way, also demonstrating the wildly extreme and broad range of punishments provided for anyone merely involved in the equally overly broad offense of “terrorism”. It is clear from this pattern of grossly unpredictable statute in and of itself that Rule of Law in the United States cannot possibly, by definition, exist. General Federalists suggest that this almost certainly will be viewed by future observers as criminal behaviour; essentially and with no undue embellishment amounting to crimes against humanity. Thus, a new idea is needed and another, more creative way to ensure public participation and representation is obviously required and simply repackaging this same problem, uncured and untreated, of western, neo-liberal democracy cannot work, especially at a global level. And to be clear, the origin of this problem, like so many other violations of Rule of Law, and if studied closely by someone familiar with the legal profession, can be clearly traced to the corrosive influence of faction and the open door policy of allowing direct participation in the creation of public policy. Persons familiar with the profession know for a fact, not by theory or ideological belief, but by fact born of direct experience in witnessing it, that this break in Rule of Law comes directly from the corrosive influence of faction.
  4. In Citizens United v. Federal Election Commission, 558 U.S. 310 (2010) the crescendo of Ravel’s Bolero reached its apogee when the U.S. Supreme Court Justices decided that corporations could donate to political campaigns just like natural persons; meaning they could do so anonymously. This means that an unknown entity could come into a Congressional district from the other side of the country and destroy a candidate in the media who was in fact quite popular there. Why in the world would the Justices do this, which amounted to allowing corporations to control elections completely? Because they have been corrupted by moral hazards. In the movie, Patriocracy, a U.S. Congress person stated that they have to plead so thoroughly to special interests that by the time they get to Washington they have absolutely no discretion: their stance on public policy has already be set in stone by the commitments they had to make in order to (A) get the campaign financing needed and (B) not invoke the wrath of special interest anti-campaign spending if they betrayed their masters and actually did what their constituents wanted them to do. But this sentiment has been echoed many, many times before by politicians. It couldn’t be any clearer that the American experiment has failed since it is blatantly impossible for any true representative governance to occur. If politicians are entirely beholden to special interests, which are by definition a factional opinion, then they cannot represent their constituents. This is a cold, hard fact. And the irony of the situation is that the very claim that an “open door policy” to allow public input into governance is somehow “democratic” is precisely what has made it not only undemocratic but not even representative. The American experiment is riddled with this dichotomy and it is screaming out what General Federalism says about the difference between executing the social contract versus delegating and revoking the political power to execute the social contract. There are now over 200 years of experience in the American experiment to make this point crystal clear. The saddest part of Patriocracy was watching what we’ve seen in this country for decades: People complain about the dysfunction of the American system but never once are the obvious and pervasive structural problems hinted at, much less discussed. The same band-aid “solutions” discussed in 1960 are repackaged and repeated in 2013. In over an hour of drivel about how to “fix” a system with solutions repeated since 1950 that isn’t just broken but mal-designed and structurally unsound, Patriocracy never once mentions the deeper structural issues involved. They’ve been talking about fiscal irresponsibility for decades. They’ve been talking about Congress’ inability to “get along” for decades. They’ve been talking about special interests for decades. They’ve been talking about Social Security for decades. They’ve been talking about the illegal, clandestine activity of the CIA for decades. Nothing has changed. It’s insanity. It’s structural.

Listen to me now hear me later … the Final World Order is coming whether we want it or not and failure to address these issues will likely be viewed by future observers as criminal negligence.

The amount of seed money needed to get the effort up and running would be relatively modest—perhaps as low as $140 million (the amount given to the State Department’s bilateral “democracy fund” last year). Based on the experience of the Global Fund—with which donors have repeatedly employed a wait-and-see-what-the-United-States-gives strategy—a significant initial pledge by the United States would be critical in leveraging other resources.

This money would be more than enough to support a convention and a series of studies on how to fix this mess, which would be the best use of that money by far, imo. Before you dismiss this as “impossible”, please read our ideas, for one. I’m sure there are other bold ideas out there as well. You can get the relevant documents here and
here. You can also view a reading and explanation of one of those documents, World Government and General Federalism here.

Given the difficult budgetary environment and skepticism of foreign aid in the United States and Europe, will legislatures support this initiative?

I hope not.

There may be greater flexibility for developed countries to provide seed money than conventional wisdom suggests. Since the financial crisis, U.S. pledges to the Global Fund have actually increased. Likewise, in March 2012, cash-strapped Japan offered $340 million to the Global Fund, its largest donation ever. To be sure, the White House will need to persuade Congress that an investment in the Global Trust would have an enormous multiplier effect in prosperity, pluralism, and peace, compared to dollars spent elsewhere. And it would.

Conclusion

Weak rule of law in the developing world deprives countless people of legal rights and, hence, an opportunity to thrive economically. A Global Trust for Rule of Law could begin to close the gap between rights that exist on paper and those that can actually be enjoyed. Drawing on the Global Fund and UNDEF as models of best practices and effective partnerships, a Global Trust, autonomous of any one state or the UN, would cultivate rule of law capacity-building projects in Latin America, sub-Saharan Africa, and other developing regions by supporting deserving proposals from states and civil societies. It would quickly become a nimble catalyst to build trust in access to justice and economic opportunity in those societies. So too would it inexorably accelerate global economic growth. Investing in such a trust would be a high-value bargain.

The author and I are in the same basic camp and my point is not to be facetious, but I am trying to drive home a point that is being, in my opinion, entirely overlooked in a way that could have disastrous results. I am afraid that the conventional view of the greatest minds we have on this subject, if I can be that bold to say this, is that they exist in a straight jacket of excessive normative thinking in terms of law and economics and cannot see the forest for the trees. They simply cannot see the vast canyon that actually exists where rule of law is supposed to be. I hope this will change in time, and the sooner the better.

Thanks again for the great article and the new ideas proffered,

-      kk

Mosaic representing both the judicial and legi...

Mosaic representing both the judicial and legislative aspects of law. The woman on the throne holds a sword to chastise the guilty and a palm branch to reward the meritorious. Glory surrounds her head, and the aegis of Minerva signifies the armor of righteousness and wisdom.

NYC - Bank of New York Building

Bank of New York Building

Hi all,

If you’ve read my articles on banking you might be wondering if there is some key piece of the story I’ve not bothered to share … yet. The answer is “yes”, there is. I’ve avoided the topic like the plauge because it is so riddled with conspiracy theories and hyperbole, an inconvenient distraction from the Fiducial Economics and Zero-Zero Banking I’ve been trying to discuss. But after hearing so many of my friends (mostly in the real world) ask me to more fully explain the existing banking system, especially here in the United States, I’ve decided to indulge. Of course, I am frankly astonished that a broader public awareness of this doesn’t already exist and I’m sure that eventually it will, so I don’t feel like I’m exposing any grave state secrets here. I’m not going to claim that this is a particularly “big deal”, I’ll just say that it is the reason why many General Federalists like myself continue to use the phrase Final World Order: we know this circus will be closing when the public finally does take it all in. The phrase is somewhat of a parody of the popular phrase used by conspiracists, The New World Order, though it also has an edge of reality to it. You’ll see why in a second.

I. The Banking system we have inherited is antiquated and you are far, far wealthier than you have been led to believe … and the bill for it goes to the bankers. It has reached its penulitmate expression in the proverbial neo-liberal, western democratic system. But I’m going to argue in the defense of bankers and suggest that the hyperbole surrounding this subject and which comes mostly from those who at least have some inkling of what I’m talking about is unjustified and based on an incomplete understanding of what is going on. So, part of this article is to set the record straight as well. The best way to explain all of this is to humor the reader with some history they may or may not already be aware of:

  1. Banks began a few hundred years ago and the modern banking systems descend from their predecessors in Europe when capitalists, or those holding sufficient capital, decided that they could loan money to others and profit by requiring repayment of the premium with interest added. In that environment, the political powers that existed enforced this scheme making it a viable business model.
  2. Banks began to take deposits of wealth from their customers, in the form of gold, for example, and would write a note that they designed and printed which basically promised and affirmed that the customer had the amount of gold on deposit at the bank that wrote the note. In this way, the customer could carry around notes, which is much easier to transport and use, and exchange it for other forms of wealth, allowing them to buy products and services on the open market. The fundamental shift and change here was that instead of having to exchange or barter wealth for wealth directly, like by trading gold for lumber to build a house, one could use an abstract, general vehicle for exchange in the form of these bank notes. Bank notes would later evolve into modern currency, but the idea is the same.
  3. If someone selling lumber to someone bearing and offering bank notes in return, this exchange is called valuable consideration because both parties considered something of value to each of them and agreed to make the exchange. When the person selling the lumber takes the bank notes, he can use them again with someone else or he can visit that bank and demand the gold that it promises.
  4. Another service these deposit holders, these early bankers, could offer was to loan money to customers with, as we said, a requirement to repay with interest. This would be done by printing notes representing the full amount of the loan requested and would, on that banks reputation, faith and credit, represent wealth on deposit (such as in the form of gold) that they actually owned themselves, not someone else’s deposits. And this made sense because it was the bank loaning the money and it is they who should be able to back their own notes.
  5. It is key to understand that at that time the likelihood of several note holders coming back to the bank on or about the same time and demanding all of their gold was highly unlikely. In that age technology limited transportation and communication and a bank thirty miles away was a great distance indeed. It took considerable effort to go visit a bank, especially ones well over thirty miles away, and communication with them and the communication of news generally was very slow by modern standards. Additionally, in the case of loans, poverty was so severe and wealth so tight, with the terms of loans so onerous, that the likelihood of a large number of people paying off their loans at once was also astronomically slim.
  6. These nascent bank owners took advantage of this by realizing a mathematical quirk. Because, for practical intents and purposes, in that day and age, it was essentially impossible for the deposits to all be demanded at once. Thus, the rule regarding backing the loaning money in the form of simply printing extra notes with actual deposits you own on hand could be manipulated and basically, to some degree, ignored. To explain, suppose I hold 1000 dollars-worth of gold on deposit from customers. None of this gold is actually mine and I’ve written notes for all of them promising that I have this on deposit and can honor each of those notes on demand. But suppose I decide that, since it is really impossible for all those notes to be brought up and all gold they represent to be demanded at the same time, I will loan out half of those gold deposits to additional customers. Now, I am writing notes and giving them to the new customers which, like the other notes, promise that I will produce the gold they supposedly represent. But in reality, I am now claiming to be able to pay out 1500 dollars-worth of gold. This I cannot do because I don’t have it. But if I cannot do something that is impossible anyway, what’s the harm? If you can’t make the demand then I don’t need to honor it. It’s a false demand. And this is where my defense of bankers begins. It is important to realize that the current banking systme is inherited from a distant past in which no one at that time really knew of any other way to do this, primarily because of technological limitations we’ll explain in what follows. So the “scheme” is not entirely deliberate or malicious.

II.Now, let us suppose that someday we no longer use gold or tangible wealth to back these notes and we just use yet more cash as the backing for deposits and loans. Furthermore, lets say that a government comes along and says, this is a great scheme you have going but obviously you can only carry this so far. We’re going to set a limit on how much currency (notes) you can loan out relative to what you actually have on deposit. Suppose they pick a number of around 10%. Thus, in the example given, it would mean that the banker could loan out 10,000 dollars in notes for every 1000 dollars-worth of gold he or she truly, physically had on deposit. Since it is virtually impossible for an instant demand for 10,000 dollars from the bankers reserves to be made, there is really no reason for the banker to guarantee his or her ability to pay that much at once.  This will all be true unless and until the technological infrastructure changes and the impediments to transportation, communication and terms of loans become less severe.

  1. Why would a government, even if the impediments aforementioned were strong, want to allow this kind of leveraged loaning? The answer is simple: an economy that allows this kind of leveraged loaning grows much, much faster. Think about it. If banks can loan out 10000 dollars in currency for only 1000 dollars of reserve, they can enable entrepreneurs and other job creators to do that much more than they could if they only could loan out 1000 dollars of notes. For this reason, this scheme of monetary policy and banking became popular during the industrial revolution becoming known as Fractional Reserve Banking. It is called fractional because banks are only required to maintain a fraction of reserves for what they loan out. In the United States, in the vast majority of cases, that limit is 10%.
  2. The problem, however, is that this system begins to slip outside any framework of Rule of Law you can place around it when these aforementioned impediments begin to weaken and become less of an issue. Rule of Law comes into play here because any Rule of Law that protects private property and provides remedy for theft can no longer guarantee that, wherever it becomes physically possible to demand these reserves, that those entitled to them will be able to get them. If they cannot, because this system was deliberately constructed this way, it would constitute theft by taking whereby no Rule of Law in that scenario would exist (there is no remedy because the traditional law presumably would not assume that this is theft by taking – there is no law, no rule of law, on the books to deal with this for what it truly is).
  3. But so far this is just a theoretical problem. The real, serious problems are still to be exposed. Consider what happens when governments decide that they will start printing these notes. This is a good thing because it standardizes the notes and makes them much more versatile and generally usable. But it does generate a slight problem. If the government prints this currency, how will it get it into circulation? In order to do that it needs banks. But here is where urban legend, public myth and a general void of understanding of economics and finance wreaks havoc on the popular understanding of monetary policy evidenced by the innumerable youtube videos on the subject. It is key and vital to understand at this point that,

Currency and wealth are two completely different things.

III. Currency is merely and solely a metric, a measuring stick, for measuring actual, real wealth. Wealth is anything that could be considered of value to anyone in the marketplace, regardless of what it is. Thus currency is just a tool used to facilitate the trading of wealth. While many will nod their heads in agreement to this, it is clear they still don’t quite understand the full implication of this when they claim that, for example, the U.S. Federal Reserve prints money out of thin air. This is grossly false. It is evident that the public is still struggling to figure out what is really going on here. There is more to the story than what most who make this claim apparenlty realize. Therefore, we need to clear the air on these public myths before proceeding.

  1. A government that decides to take on the task of printing, or minting, currency for use throughout its jurisdiction must do several things. First, it must enact law that demands, under penalty of legal remedy, that this currency be the only currency and that it be accepted on demand; that it be legal tender. If it does not do this not only can others mint their own money and refuse to acknowledge the “governments” money, it means that if other currencies are circulating sound monetary policy becomes impossible because you cannot influence “extra” legal currencies. But this problem runs yet deeper and a brief aside is needed to explain how. Recalling that currency represents wealth, one can easily grasp economics even at the global scale by understanding and following the mantra that currency chases wealth, not the reverse. Therefore, in a stable, healthy economy, all currency in circulation within a jurisdiction (economists call this M1) should accurately reflect all wealth under the auspices of that jurisdiction. This is absolutely vital to understand. And whether or not it is accurate is based on how the market esteems value, making this calculation very hard to perform. So, if some other currency is out there and no law exists to give the governments currency the full faith and credit of Rule of Law (backed by law) then it means that the “nations” wealth is not fully denominated in the government’s currency. Thus any monetary policy will only have a partial, perhaps balkanized effect on the economy. So, this is unacceptable. Imagine trying to get a country out of a financial crisis when you realize, because of all these currencies, or because not all States recognize the currency as legal tender (this would be the case where a State does not recognize the full authority of federal, or central, law, the problem the European Union is facing), you cannot address the crisis because, basically, you don’t have adequate control over the currency circulating in your “country”. This is a simplified explanation of what is going on, but the reality tracks the ideal quite well. Therefore, Rule of Law backing a single currency with the full faith and credit of the regnant government is absolutely essential for a stable, durable economic system to exist.

IV.The second thing the government must figure out, as already noted, is how to get this currency in circulation without destabilizing or harming the economy. It will be helpful to first demonstrate how the United States solved this problem. So, we can now return to our discussion of the case of the Federal Reserve System. Here, there are twelve Federal Reserve “banks” scattered about the United States. The Federal Reserve is itself a quasi-private entity to whom Congress has farmed out its minting job. It is accountable to the U.S. Congress and has been audited every year since 1978 (Public Law 95-320). Its relationship to the federal government is essentially identical to the relationship of the United States Postal Service to the federal government. Neither is entirely private since their so-called “Board of Governors” – what they call their company officers – are appointed by the President. So, when the Federal Reserve mints new currency it first deposits it into the Federal Reserve Bank of New York, which is the one Federal Reserve Bank designated for that purpose. Then, the United States government will offer the Federal Reserve financial instruments that denominate the aggregate wealth of the United States, both at present and as a future, speculated value. This is done through a select group of intermediary financial institutions. In exchange, the Federal Reserve pays for this using the newly minted currency by depositing that newly minted currency from the Federal Reserve Bank in New York to United States government private bank accounts. This is called valuable consideration and has nothing to do with printing money out of thin air. Typically, the instrument sold is a U.S. government bond (but generally is any USG Security). Whatever the security involved, they are generally financial instruments that constitute a fractional “metric”, just like currency, but which include speculative future value metrics of wealth (here also called debt). In other words, the United States government is selling speculative national wealth – with the Federal Reserve being its go-between to the private investor market – and being paid for it in return. This is called monetizing debt. The payment in newly minted currency mostly pays for the speculative value of national wealth believed to be imminently created after the print run. Why? Because that is what the print run is all about. The “monetizing debt” part of selling USG securities is a red herring that all too many have fallen for. USG has sold securities to the public for a long time. This is merely the vehicle they are using, as a secondary purpose, to allow actuarially sound valuable consideration for newly printed currency. The newly printed currency reflects the new wealth that this currency itself will soon generate by being loaned out to entrepreneurs around the country. The Federal Reserve can also sell these securities back into the open market to reduce M1, or reduce the currency in circulation. But we must point out that another method of circulating currency not well known to the public is the so-called discount window, a means of loaning newly minted currency to an exclusive bank membership at interest. By adjusting that interest rate, it can influence how much interest banks further down the chain charge. But it can only reduce the interest rate it charges for these loans to some value greater than zero, so it is not a tool for pumping large amounts of new currency into circulation. The irony of this awkward and antiquated system is that USG has to run a deficit in order to push new currency into circulation (when on the gold standard it had to acquire more gold). But this requirement means they have to also go through the full mechanics of establishing a proper paper trail for that debt; the aforementioned red herring. That is why the securities are sold to the Federal Reserve in exchange for the new currency minted. And this is why the phrase “monetizing debt” is used. It’s a backward way of describing what is actually going on. They are in fact indebting money for no other reason than the fact that running deficits is the only way to circulate all the new money fast enough to keep up with their print rate. The discount window isn’t wide enough. And the problem is grossly exacerbated by globalization because the United States Dollar is the reserve currency; meaning the Fed must print money fast enough to denominate vast amounts of new wealth outside the United States as well. And the globalization is driven by capital accumulation. In other words, the United States is running a grossly antiquated central banking system that is so clumsy they have to run massive annual deficits just to mint and emit currency, one of the most basic jobs of any government. And the Cookie Monster driving it is Capital Accumulation, first cousin of the infamous Triffin Dilemma.

  1. Recalling that currency chases wealth, if the aggregate wealth within a jurisdiction increases over some time interval, call it t, then in order for the economy to remain stable and for the total currency in circulation to accurately reflect the markets perception of what that wealth is worth, the total currency in circulation, sometime during t, must increase by a proportionate amount. Let us repeat that: currency chases wealth. So, the old wives tale of the impropriety of printing money is nonsense. And it usually begins by fixating on the phrase “monetizing debt” and reflects a complete misunderstanding of what that actually means. And this disinformation is being broadcast all over the internet and it is a disturbingly deep misunderstanding of what is going on. It is such a popular myth that even prominent public figures have come to believe it and spread the falsehood. Persons like Ron Paul, G. Edward Griffith and Pat Buchanan continue to spread this falsehood. What matters is how much currency is printed and thus how much debt is monetized; not the mere fact that “debt” is being monetized. Governments must print money because if they don’t, as aggregate wealth increases, which it almost always does in the United States, you will create deflation of the dollar. Let us explain what we mean about how money should be printed.
  2. Suppose, in this greatly simplified example, the entire currency in circulation in this “country” is just 100 dollars and we begin with a condition in which the market believes (this is better stated as when they engage in exchange in the market their behaviour indicates this belief) that all aggregate wealth in their “country” is worth 100 dollars. Fiscal policy is balanced at this point. Now, suppose the “government” decides to print 100 more dollars. But suppose that the wealth never changed; that is, the same “stuff” is there and nothing new has been created nor did the wealth already there depreciate. This means that we now have 200 dollars acting as the metric for 100 dollars-worth of wealth. This necessarily means that it now takes two dollars to accurately measure the wealth that one dollar used to accurately measure. This is called inflation because the dollar is now “worth” only half what it was before (it takes twice the money to buy the same thing as before).

V. Conversely, if we remove fifty dollars from circulation (reduce M1 by 50 dollars) then the wealth once accurately measured by one dollar now requires only fifty cents to accurately measure. Thus, the dollar is now “worth” twice what it was. This is called deflation and it takes only half as much money to buy the same thing as before.

  1. The holy grail of fiscal policy in the United States since the founding of national banks like the Federal Reserve has been how to know and accurately print the right amount of currency at the right time to match changes in wealth. That is the key to understanding fiscal policy in the United States and in most other countries. Recalling that currency chases wealth, monetary policy is all about figuring out how much money should be in circulation, which, by indirection, is a game of assessing and tracking aggregate wealth. So, the United States solved this problem in its case by creating a private institution that would, in reality, primarily be tasked with advancing the state of the art in tracking wealth, not just in the simple examples we’ve discussed here, but aggregate wealth as found within specific industries, nationally, internationally, by country, etc. After about one-hundred years of doing this, they have honed this art to a science and are very good at it.
  2. The scheme of printing money and selling speculative “national” wealth (which, by the way, returns to the U.S. government Treasury as Federal Reserve profit, thus closing a loop of currency circulation consequent to new currency being injected into that loop and thus rendering the whole process sound) continues by taking the proceeds from that transaction, which end up in private government bank accounts, and pumping it into the economy through the only means a government can move money into the private sector; government budget spending. Now we can more clearly see the connection between government spending and rapid increases in national wealth: as national wealth increases government budgetary expenditures must also increase; that is, the pipe through which currency is being channelled into the private sector has to get fatter. Why is this? Because, recalling that currency chases wealth, whenever the Federal Reserve performs a speculative, large print run, the total currency in circulation will, while it is making its way throughout the economy and reaching its final end point, be disproportionately larger than the aggregate wealth it represents. Therefore, this currency must move quickly into the private sector and quickly be converted into new wealth. That is done by the bank loans aforementioned made to entrepreneurs of other creators of wealth. During the time it takes to circulate this currency, call it t, significant inflationary pressure is felt. But in order for inflation to take hold it takes some time. As long as you can get this currency circulated all the way to the point where it is converted to new wealth faster than it takes inflation to take hold, and if the amount you printed is accurately converted to new wealth and reflects all the new wealth created in the immediate past before your print run, you will not see a significant rise in inflation. Currency matches wealth. As you can see, the monetary policy makers are playing a constant game of print, observe, then print again. They print currency and see how far off they were. Then they adjust the next print by taking that into account. Returning to our question, government budget spending in this scheme ultimately becomes unsustainable if the rate at which wealth is being created is too high, because the government spending pipe has to be larger than is financially feasible in order to move large amounts of currency quickly to avoid inflationary catastrophe. Keep in mind that the spending we are talking about here is not from the simple recirculation of revenue, since that is the spending of currency already in circulation. The kind of spending required is deficit spending and that would have been true since the gold standard was removed in the early 70’s. So, this is the real, “secret”, reason that toilet seats cost USG 500 dollars. And it is indeed secret because those that understand this stuff don’t talk about it because so many obvious, unpleasant conclusions will spill out at once. Thus, the unfortunate irony and weakness of this system is that the more prosperous the economy becomes and the bigger it gets, the more government spending is required. And the discount window won’t solve this problem because pumping too much currency through it would require a dropping of interest rates to less than zero. So, the overall system is unsustainable if we purpose to devise an economic system whose growth is unbound.
  3. Once again, Rule of Law comes into play. If the federal budget is beholden to an arbitrary (arbitrary from its perspective) mechanism for managing fiscal policy then there is no guarantee that Rule of Law will be followed faithfully when actions are controlled by external economic factors deliberately put in place.
  4. Finally, we can more clearly see what happens if we remove some very old assumptions. Notice that this particular Fractional Reserve Banking scheme is based on assumptions that are technologically grounded. Three hundred years ago there really was no other way to do this, at least not any way that worked well. Having to use banks as the vehicle to mint currency and distribute it was a necessary evil. Using fractional rules was a necessary evil to make economic engines churn. Meanwhile, bankers made unbelievable profits from this system. Banks are basically institutions skimming off the top of national wealth creation. So, keeping in mind that the point of this operation is to mint and distribute currency such that it matches existing, aggregate wealth as accurately as possible, it is useful now to ask if there is a simpler, more just way of doing this that does not undermine Rule of Law. And the answer is refreshingly simple and obvious once you digest it. It’s called Zero-Zero Banking and is an integral piece of General Federalism. But that’s another discussion. But we’ll need to explain this solution broadly in order to better illuminate the nature of the problem with the existing system.

VI. The same process of assessing how much currency to print based on an assessment of new wealth both recently and about to be generated in the macroscopic style in which it is done can also be done microscopically with much greater effect. But to do this requires modern technology not available to bankers even 50 years ago. The solution is to make these assessments, these measurements of wealth, individually, minting a specific amount of currency to match a specific new wealth generation proposal. Thus, a new enterprise is proposed and, just as one does with a bank, a risk and actuarial analysis is conducted to determine the likelihood of both new wealth generation immediately, and new wealth generation long term. If the risk is market tolerable and if it is rendered actuarially profitable, there is no reason why a minting authority cannot simply print the currency needed to start the enterprise with no need to repay the principal or repay with interest. It, in effect, requires zero reserves and requires zero repayment, making it incredibly aggressive as the kind of economic engine Alexander Hamilton dreamed of when he thought about fractional reserve banking. If there ever were “something they don’t want you to know”, it is this. A multi-billion dollar industry would be totally without justification and exposed as a Ponzi scheme overnight if those that understand this stuff were to talk about this (technically speaking, it is not a Ponzi scheme but is rather an earnings swindle). The solution here provided is a mirrored parallel of what is done in the United States today, the only difference being that the math of monetary policy is done per enterprise, not en masse.  We call it Zero-Zero Banking (even though there are really no banks in such a system).

  1. One potential drawback is that if you create a scheme like this it inevitably means that all enterprises must be publicly owned. For how could you justify the government simply printing currency and giving it away? But this problem runs deeper than that. The wealth generated must be publicly owned in order to have a scheme that does not require repayment of any kind. By not requiring repayment, when the government prints new currency that currency is measuring wealth that the nation as a whole actually owns, which includes all the people and the government … everyone.

This also fully eliminates Rule of Law and cannot be permitted in a durable, global scheme. Rule of Law does not exist at all in the United States, and that is why we call their lauding of Rule of Law by so many in this country hypocritical.

VII. Wherever the aggregate wealth of a society is owned by all, the government is essentially now buying wealth (that, by virtue of being the executor of the social contract, presumably has the right to barter on behalf of the community) for cash and deeding it back instantaneously (as part of the transaction) to the community as a whole, the general public, because that is where it got the wealth from. Therefore, one must be very deliberate and careful in how they structure this system. For we can now see why the idea of a Public Trust came so naturally: we sought a way to handle the natural consequence of Zero-Zero Banking without entraining all the foibles of socialist and Marxist economies.  The Public Trust is not governmental, is an independent legal entity and the government has only limited, specific Trustee powers over that Trust.

  1. Finally, we need to point out another reason why we project that, given sufficient but foreseeable time, neo-liberal western democracy will fail badly, at least if it maintains any of the existing, traditional economic systems to include both Capitalism and Marxism. To explain this, we first note that two theoretical constructs called “Capital Accumulation” and the “Triffin Dilemma” are in fact two sides of the same coin. Capital accumulation was an idea made popular by Karl Marx and is one of the few things of Marxist flavor that economists generally agree is probably true. The Triffin Dilemma however, appears on the surface to be a completely different idea. Capital accumulation avers that any capitalist system, given sufficient time, will tend to create and accumulate new capital disproportionately into the hands of a minority of capital holders thus denying the majority access to the same. Given sufficient time, the majority ends up with too little to survive and the system will necessarily fail. The Triffin Dilemma, on the other hand, says that if trade becomes too imbalanced for too long, the world’s capital flows will become unnatural and will push all the world’s wealth into the United States, a fatal act to global trade and all economies. What is not obvious on the surface however, is that this is just a recasting of capital accumulation at the global level. What it is showing is that Capitalism tends to cause capital to accrete in the hands of a minority and that this is, ultimately, a fatal trend. The United States has managed to deal with capital accumulation remarkably well. First, it promoted a massive increase in consumption, which serves as a tap to draw off some of that excess wealth that causes capital accumulation. Once this played out they moved to credit, particularly unsecured credit. And when that played out they began literally killing the consumer in the United States when the machine turned to producing highly disposable products using a concept called planned obsolescence; basically manufacturing goods whose useful life was unnecessarily short. Finally, when everything got about as cheap as it could get, that same machine turned to globalization and the beginning of the Triffin Dilemma; the last great “adjustment” available before the entire earnings swindle collapses in which the capital in the rest of the world is similarly sucked dry and accreted into the hands of the capitalists. The capitalist machine keeps adapting but its running out of aces and at some point must fail. This is the 800 pound gorilla in the room that few are talking about but a beast that is going to rule the house at some point in the future. The well-respected academic David Harvey spoke of this same recent tactic of globalization as a tool to ease capital accumulation when he referred to it as solving the accumulation problem by “outsourcing” industry in the United States to locations overseas. This is just one way of saying the same thing.
  2. Capital accumulates in the hands of the capitalist investors, a minority of the population, because in order to invest in business one must apply capital. The whole idea behind capitalism is that as a result, when you succeed, you generate more new capital from that enterprise than the amount of capital required to start the enterprise. Thus, capital grows over time. But since the capitalist is the one doing the investing and reaping the profit, all this capital remains in their hands. Ultimately, most capital starts out as natural resources. If we assume that capital is finite, which is not a certainty but is probably practically true, eventually all of the world’s capital will end up in the capitalists hands and everyone else will have none. If non-capitalist have no capital they will die. They will die because you can’t lease everything. Food, for example, cannot be leased or owned by someone else if you eat it. Thus, before reaching this point, the argument goes, capitalism must fail. But even if you could render the majority without any wealth whatsoever, the capitalists would no longer be able to invest as all the capital would be in use. Consequently, the economy would fail. It is certainly true that there are several variables one can play with to make this game last longer. For example, the pay and hours worked by employees can be improved, which just slows down the accretion of capital. You can recycle capital once is depreciates sufficiently (but the return on this is still finite). Or, you can find new markets from which you can siphon and extract yet more capital by doing things such as globalizing the economy (where the newly accessible wealth is also finite). That is what capitalism is doing today to compensate for an over-accretion of capital already present. But Marx’s point was that this system must ultimately fail. Globalization of the economy, as one compensatory mechanism, is where the Triffin Dilemma enters. If capital accretes by a net trade deficit (bringing in more wealth than you are sending out) at an uncontrollable rate, the Triffin Dilemma theorists have noted what Marx did: the economies will all collapse because the countries outside the United States cannot participate in trade if they have no wealth and that in turn would bring down the U.S. economy. With no hint of irony, the die-hard capitalists talking about the Triffin Dilemma are just validating Karl Marx. You cannot run an earnings swindle of this kind that accretes capital without bound since the earnings ultimately depend on the laborers retaining capital.
  3. The solution to the above is that any durable, sustainable system must have a means by which the community, through a representative process bound in Rule of Law, can plan an economy to some limited degree, preferably by controlling only what and how much of what is produced, leaving the rest to market forces. By having some deliberate say in what is produced one can control or limit the over-accretion of capital, control consumption rates of energy and natural resources, manage capital already in use, recycle it and ensure that basic needs are met first. If the only thing pursued were basic needs capital accretion would immediately become a non-issue. We’ve touched on this subject in our discussion of the Public Trust, but the key idea here is to minimize interference in natural laws (economics) by taking care to only inject tools minimally sufficient to expose these natural laws to Rule of Law and general equity. Our analysis of the failure of various socialist economies, such as the economy of the USSR, indicated that this was one area of economic planning that had no significant impact on the causes of the collapse. The failure of these systems was overwhelmingly associated with the means of production; that is, governmental control over how capital gets used, businesses are run and valuable consideration occurs. Conversely, the what of production in the USSR, which is what we propose to subject to Rule of Law, outperformed that of the United States. The statistically analysed economic history of the USSR is a tragically schizophrenic story in which in some ways the economy set world records for performance and in other areas set world records for failure. By invoking this more focused and narrow form of centralized planning, we are planning only with respect to what we “dig out of the ground”; we’re concerned only with the best use of the Periodic Table and the various useful minerals Earth has to offer, something academics call “optimum allocation”.

VIII. A final note about Fiducial economies and Zero-Zero banking is that we have exposed something that the astute reader might have already noticed. Start with no economic theory or assumptions at all and assume a technological and industrial infrastructure already exists. Then why couldn’t we just set it up so that everyone could just go to factory x, request that x manufacture a product y and give it to us? Because, after all, when people from factory x come to the factory where I work, say, factory z, I will do the same for them? This would work with two limitations. One, the economy would have a ultimate limit in that it could only honor requests like this up to its capacity to produce the products requested in the time frame desired. This would necessitate a queue into which we must place our request. And if a request made by some random person and maybe a law to go with it was all one had to motivate them, it is not likely they will be very productive. Second, some means of balancing the queue would be needed because otherwise someone who can make more requests faster could get more stuff than anyone else. To make it equitable, we need to “load balance” these queues. But of course, in order to do these two things we might as well introduce currency, which would solve both problems. But alas, this is exactly what Fiducial economics is. Fiducial economics is simply a way of reducing an economy to its simplest possible form, which in turn allows us to eliminate outdated schemes that hugely profit a minority of participants; in other words, banks. Because the technological capacity to create a Fiducial economy didn’t exist in the past, banks were the only way to do this and the massive profiting of bankers was a necessary evil. But this is the 21st century and these elaborate and complex schemes for minting and emitting currency; speculative instruments, fractional loaning, principal that must be repaid and interest on principal are all unnecessary with today’s technology. All we need is a queue of requests in which laborers are motivated and the queues are balanced equitably and directly with currency.

Finally, we can return to the current dilemma and more fully explain what is going on. The natural question comes up, “then what are the banks in the United States doing exactly?” Since banks in the United States and in fact in every so-called “free market, neo-liberal system” are loaning money and requiring repayment not just of the principal but of interest as well, clearly there is more to this story. Indeed. Recall that when I spoke of the Public Trust under a Fiducial economic system that every laborer is, by their labor, appreciating the market value of the wealth held in Trust. In other words, all of the gains one sees in new wealth upon every currency print run is generated by every working individual in the country. Some of that comes from the expoloitation of new natural resources, but this is really only a small fraction of that total. What the banks today are doing is they are using the fractional reserve rules to “assist” the Federal Reserve with its print runs. This is why they have the discount window in the first place. If the Federal Reserve wants to match currency to weatlh, their primary job, they need a way to influence private banks into either increasing or decreasing their loan rates. The private banks are, in effect, “minting” money on behalf of the government when they loan money they don’t actually have to borrowers (recall that under the U.S. Fractional Reserve Banking system the banks can loan 10,000 dollars for every 1,000 dollars they have on deposit). And now you know the rest of the story. The principal and interest repaid in fact is the currency representing the appreciation of the aggregate wealth of the U.S. economy by laborers, not bankers. It properly belongs to the former. Rule of Law is now violated because de facto theft is occurring even though no laws changed, what General Federalists call “technological deregulation”.

To be perfectly clear, the bonds USG sells to the “Fed” are in turn sold to the public. Then the Fed takes the money it receives from the buyer who paid with money already in circulation and sends it back to the U.S. Treasury. Thus, USG is selling bonds on the open market – to the public – by using the Fed as an intermediary. This increases USG’s revenue however, this payment is based on bonds which are essentially IOUs repaid with interest. So, the citizen is getting bilked from two directions. First, the loan principal and interest repaid is not paid in such a manner as to remove the money from circulation. Rather, it is paid by the citizen – the laborer – to the private banks that loaned the money. So, the currency loaned, the newly generated currency, continues to reflect increases in the aggregate wealth of the country and remains in circulation. But what has happened is that, due to this repayment of principal and interest, the new wealth that the citizens generated is redistributed to the capitalists who own the banks. On top of that, the citizens will have to pay the taxes over the many years over which the bonds mature in order for the government to make good on its IOUs. But this is also a wealth redistribution scheme because the citizen is transferring their wealth via currency and taxes to the original investors who bought the bonds. And both of these kinds of redistribution are fraudulent because the wealth being redistributed through currency was created by the laborer – the citizen – not the banker.

One more thing to note is that the Fed – and most people who benefit from this system – astutely avoid mentioning this wealth-currency connection openly or explicitly and prefer to refer to money as deriving its value from the “confidence” the market has in its integrity. But this is just a vague way of saying that it is based on wealth because “confidence” derives of wealth. In order for money to have value one must be confident that some real wealth as the market percieves it exists out there to back it up. In fact, that’s all gold is, just one specific, narrow form of wealth. It’s pathetic to hear economists talk out of both sides of their mouths when discussing this; noting first that currency is a metric of weatlh, then referring to money’s “value” as being derived of market “confidence”. It’s an absurd exercise in semantic calisthenics. The secret of Oz – the secret of how neo-liberal monetary policy works in virtually all countries today – is that currency chases wealth. The minute one understands this the vile depth of the fraud of the system becomes obvious and clear.

Finally, I should note that the Fed rule regarding reserves is a bit tricky and misleading at first. It has caused many to get confused over exactly how it works. When a deposit is received at a bank, call it bank A, and the amount is x, then what the Fed rule actually says is that bank A, upon the act of depositing x, is authorized to “flip a switch” and loan out 0.1 * x of that deposit amount. In other words, the actual money deposited in the amount of x is not actually used for the loan, it merely authorizes the creation of 0.1*x dollars to produce a loan in valuable consideration of a promissory note. I won’t call this deliberate but it certainly lends itself brilliantly to misleading those who work in the banking industry into believing the rule as simply requiring that banks are required to set 0.1 * x aside as reserves upon any and every deposit of any value x. This is not what the rule says, however. It isn’t that any deposited money is set aside, it is that the deposited money, by virtue of the fact that it was deposited and has an amount of x, authorizes the crediting of an account by (1 – 0.1)x upon consideration of a promissory note. So, by example, if the Fed deposits 10,000 dollars into an account at bank A, then bank A can prove a promissory note in the amount of (1 – 0.1) * 10000 = 9,000 USD. Should the recipient redeposit this amount, say, in bank B, then bank B can repeat the process. But this time, as the rule stated requires, bank B is authorized to credit another account by 9,000 * 0.9 = 8100 upon the proving of yet another promissory note. This process can repeat ad infinitum until the bank is unable to loan any remaining fraction. Since banks are for-profit institutions, this will likely be aggressively exhausted. The Fed has to estimate how much actual currency this will create and match that to changes in wealth if it is to avoid disastrous inflation or deflation. And it uses the discount window to speed up or slow down this loaning process (like adding or taking away nitro from a race car). I’ve taken the time to add this clarification because I’ve seen youtube videos of apologists for the system claiming that the scheme only requires that 10% of all deposits be set aside as a reserve. And that is a half-truth. And as I stated, it is brilliant in that it tends to mislead one precisely in that direction.

So, finally, in defense of the bankers, what would we expect them to do as the 20th century rolled on and it became evident that it was technologically possible to abandon this old scheme and do something that might be not a little fairer, like, say, Fiducial economics? Do we think they were just going to get on the radio with FDR in a fireside chat and tell us, “oh, just kidding, we can fix that now”, and willfully surrender billions upon billions of profits for all bankers nationwide? They couldn’t do that. No one person had the power to fix that system. They still don’t and they are terrified you are going to figure all this out and start raising hell.

A friend of mine has very generously offered his time to do a video series on my document, “Introduction to General Federalism” which explains all of this in more detail. It provides the entire story of the public myth of neo-liberal western democracy and is worth the time to view. You can find it here (look for the video series, “World Government and General Federalisim” found on the first page). So, there you have it. No one is printing money out of thin air and no one is deliberately enslaving you. But it certainly is an unsustainable Ponzi scheme. In any case, this age-old dilemma that no one wants to have to deal with is the 800 pound gorilla in the living room, the nasty, perverse in-laws no one wants to discuss, that is going to blow this can wide open. And this is why I’m hoping to set the record straight and disabuse anyone of any of the popular urban legends and conspiracy theories that are cropping up as a result of greater awareness generally of this issue. I hope it was helpful.

- kk

Experiences from bank runs during the Great De...

A bank run during the Great Depression, not technologically or socially possible much before the 20th century.

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