the new — practica laws—- l of global...

The New — Practical "Laws"—-

of Global Economics •

Why Taxes are the only tool remaining! by M a r t i n A, Armstrong

former Chairman o f P r i n c e t o n Economics In.t'1, L t d . Copyright Nov. 26th, 2008

One o f the h i g h l i g h t s o f my e a r l y career was M i l t o n Friedman attending one of my l e c t u r e s . At f i r s t I was s u r p r i s e d t h a t such a great mind would take the t±ne t o cane l i s t e n to what l had t o say. I was not an academic. T was a g l o b a l a n a l y s t and f i x e r - u p p e r J But then I reansmbered t h a t back i n 1953, M i l t o n had argued f o r a f l o a t i n g exchange r a t e system r a t h e r than a f i x e d exchange r a t e system designed a t B r e t t o n Woods du r i n g 1944. M i l t o n had seen the f r e e market forc e s adding the checks and balance t o keep governments i n l i n e . As our convers a t i o n progressed, I r e a l i z e d I was doing what M i l t o n had proposed and I was i n the f r o n t Lines, indeed, i n 1997, I t e s t i f i e d before the House Ways S Means Committee on g l o b a l t a x a t i o n a t the request o f then Chairman B i l l Archer- When you t e s t i f y before Congress, they group you i n t o '• panels w i t h l i k e persons. I was placed on a panel w i t h other economists who were pure academics. B i l l a pologized f o r the grouping because there was j u s t no one q u i t e i n my f i e l d . 1 was not theory, but p r a c t i c e . !

I never met John Maynard Keynes. Nevertheless , as the hands-on-guy who j u s t d i d not f i t i n t o t h a t i v o r y tower model, T had t o d e a l w i t h r e a l - w o r l d e f f e c t s o f the f l o a t i n g exchange r a t e system t h a t was born i n 1971 through a mere trade d i s p u t e u n l i k e B r e t t o n Woods - X b e c m a g l o b e - t r o t t e r r u s h i n g around from one c r i s i s t o another. I would meet w i t h c e n t r a l bankers and even l e c t u r e d before them i n meetings such as i n P a r i s o r i n Toronto, and was asked t o f l y t o B e i j i n g i n 1997 t o meet w i t h the C e n t r a l Bank of China d u r i n g the A s i a n Currency C r i s i s . SO what i had t o o f f e r was a f r o n t row seat t h a t few ever achieved. M i l t o n helped me appreciate the unique p o s i t i o n I ended up i n - the B i r d ' s Eye view o f the world.

There was a f i e r c e b a t t l e between the t h e o r i e s of Keynes and Friedman, i n e f f e c t , Keynes had advocated t h a t government could s t * * r the economy through t h e economic t u r m o i l by manipulating i n t e r e s t r a t e s and taxes whereas Friedman argued government could never s t e e r the car and a t b e s t the ksy r e s i d e d i n the q u a n t i t y o f money. Th i s b a t t l e raged between the 1950s through.the 1970s. M i l t o n was j o i n e d by K a r l Brunner and A l l a n M e l t z e r , who became known as the "monetarists 1' t h a t were a t f i r s t t r e a t e d w i t h d i s d a i n . But the "ore o f the monetarists theory was deeply rooted i n the t h e o r i e s of John Locke (1632-1704),: David Hume (1711-1776), John S t u a r t M i l l (1806-1873*, and David Ricardo (1772-11833) • E v e n t u a l l y , d u r i n g the C a r t e r A d m i n i s t r a t i o n of the l a t e 1970s, Congress ordered the F e d e r a l Reserve t o take the monetarist arguments s e r i o u s l y .

I d i d not s e t out w i t h a burning d e s i r e t o be an academic. Nor d i d I seek a journey t o change the laws o f economics. I was an a n a l y s t seeking o n l y p r a c t i c a l answers t o be a b l e t o cope w i t h the world and understand investment. Before fax machines, the a n a l y s i s I produced was d e l i v e r e d by Western Union v i a t e l e x and i n the e a r l y 1980s, sending j u s t one t e l e x on one market cost $5y,_

ttna\enniyaie"ea^ group i n c l u d i n g previous metals, stock Indexes, and a l l major c u r r e n c i e s . The c o s t t o take a l l the s u b s c r i p t i o n s c o u l d exceed $200,000 j u s t i n t e l e x fees t h a t adjusted f o r i n f l a t i o n i n 20D6 d o l l a r s would be - $2 m i l l i o n . So the audience j u s t happened t o be the major i n s t i t u t i o n s and government around the world. By sheer chance, what emerged was a i n c r e d i b l e opportunity t o see l i k e Adam Smith the r e a l movers and shakers. F i n a l l y , i n 1935, I decided t o open our f i r s t o f f i c e o u t s i d e of the United States i n London. The reasoning was t h a t i f T c o u l d send j u s t one t e l e x to London and then a l l o w them to r e d i s t r i b u t e from t h a t p o i n t , the costs Hnild d e c l i n e and we could expand our c l i e n t base i n t o the l e s s o r middle c l a s s o f c o r p o r a t i o n s , I met w i t h the head of a major Swiss bank i n Geneva. We had become f r i e n d s and I t r u s t e d h i s advice. I asked him what name t o use. T was assuming something European. He asked me t o name one European a n a l y s t . I was embarrassed. I Could not. He s a i d t h a t was h i s p o i n t . Ha s a i d everyone turned t o me because I was American, and Americans could care l e s s i f t h e i r currency rose o r f e l l . But Europeans were trapped i n t h e i r a n a l y s i s by t h e i r p a t r i o t i s m . The B r i t i s h were alweps b u l l i s h t h e pound; the German the mark, and the French the. frane-

The fundamental problems w i t h economic t h e o r i e s i a J u s t t h a t . They are t h e o r i e s , I d i d not seek t o e s t a b l i s h any new theory' no-less create "laws" t h a t are f i x e d and u n y i e l d i n g . But we sometimes t r a v e l down a road and get hungry. We search f o r a place to e a t and on t h a t r a r e occasion, we stumble upon a new d i s c o v e r y - a great restaurant that brings, a smile t o our face upon remembering.

The economy i s l i k e a c h i l d , i t grows and matures. We may expect one c h i l d t c end up i n one p r o f e s s i o n , only t o d i s c o v e r they explore an e n t i r e l y d i f f e r e n t path. The problem w i t h economists i s they have perhaps not seen what T have seen, such as the v a s t pool of' funds t h a t runs around the world a l t e r i n g the course of n a t i o n s and d e s t r o y i n g the best plans o f men and p o l i t i c i a n s .

Why do we need the "New P r a c t i c a l 'Laws' o f G l o b a l Economics" today r c r e than ever? The reason i s we are f l y i n g i n a j e t but are s t i l l a c t i n g as i f we have a prop-plane. Many o f the p i l o t s c o u l d not make the t r a n s i t i o n t o a j e t because they were unable t o respond q u i c k l y t o consider the dramatic i n c r e a s e i n speed. We have the same problem i n managing t h e economy.

The t h e o r i e s t h a t p r e v a i l today bounce back and f o r t h between Keynes and Friedman w i t h a l i t t l e Marx thrown i n f o r f l a v o r . Do we increase money supply, lower i n t e r e s t r a t e s and taxes, o r j u s t r e g u l a t e e v e r y t h i n g t h a t moves and pretend we are not t a k i n g the toys away from the k i d s as Marx advocated? Co we ignore the I n v i s i b l e Eland of Smith t o the p o i n t t h a t we are b l i n d t o the s e l f - i n t e r e s t o f Government t h a t cannot s l e e p a t n i g h t unless i t f e e l s i n complete c o n t r o l o f our l i v e s ?

When go l d was money, the c a p i t a l flowed between nations only because t h e r e was, as David Ricardo e x p l a i n e d , a comparative advantage..This was t h e key t o i n t e r n a t i o n a l trade - t h e i r d e s i r e t o purchase something one could not o b t a i n l o c a l l y or was a t a s i g n i f i c a n t l e s s o r p r i c e a l l o w i n g f o r " a r b i t r a g e " t h a t gave b i r t h t o insurance to cover the r i s k of l o n g voyages. This " a r b i t r a g e " s t i l l e x i s t s today j u s t i n the form of e l e c t r o n i c t r a d i n g on a g l o b a l s c a l e . We need a new understanding o f c a p i t a l and hew i t moves because we're not i n Oz anymore Dorothy!

Most t h e o r i e s i n economics are not p r a c t i c a l ' . because they are based upon assumptions t h a t are not r e a l . The same problem has wiped out the Investment Bankers because (1) they create mcdels by young students who do not understand market dynamics, and (2) they assume there i s always a market and f a i l t o map those pesty p e r i o d s when the model would f a i l such as the Great Depression. T n T f i T l s ' - a i t f n ^ ^ ^ d i f f e r e n c e between the o p t i m i s t and the pessimist. who both are blown o f f the top o f the Empire S t a t e B u i l d i n g . The P e s s i m i s t says immediately - "Oh my God I am going t o d i e l " The o p t i m i s t can be heard while p a s s i n g the 4th f l o o r -"Well so f a r so g o c d l "

LAW ffl - C a p i t a l Moves To A v o i d Danger G l o b a l l y i

This law would seem t o be s e l f - e v i d e n t . We have a l l heard o f the " f l i g h t t o q u a l i t y " where i n a domestic econcmic d e c l i n e , c a p i t a l f l e e s stocks and p r i v a t e assets moving t o the best q u a l i t y t h a t may be Government short-term paper.

However, c a p i t a l r e a c t s the same way g l o b a l l y and those reasons are not always apparent d o m e s t i c a l l y .

(1) c a p i t a l w i l l f l e e a war o r t h r e a t of war. During World War I and I I , the c a p i t a l flowed to the United S t a t e s . By the end of World War I I , the United States had 76% of the world g o l d reserves. During the Suez Canal c r i s i s , the d o l l a r r o s e on c a p i t a l f l e e i n g Europe as they once again perceived a r i s k , although i t ; was v ery b r i e f . Yet d u r i n g the Cuba M i s s i l e C r i s i s , c a p i t a l f l e d the opposite t o Europe. The same was t r u e f o r c a p i t a l began t o f l e e i n advance of various middle east wars.

12) c a p i t a l takes f l i g h t when i t f e a r s unstable economic c o n d i t i o n s t h a t can be caused by i n f l a t i o n , t a x a t i o n , n a t i o n a l i z a t i o n , g e o p o l i t i c a l , o r negative perceptions i n p o l i t i c s - a n d the economy a l t e r i n g confidence.

EXAMPLE:

The Great Depression was made f a r worse by p o l i t i c i a n s who d i d not understand g l o b a l c a p i t a l flows t o q u a l i t y . I n Herbert Hoover's Memoirs, he has a l l o f the documentation t h a t revealed World War II- began w i t h the f i n a n c i a l markets i n the 1930s t h a t l e d t o nations a t t a c k i n g t h e i r bond markets t h a t l e d t o the wholesale c o l l a p s e of European debt. Even B r i t a i n went i n t o a moratorium on i t s debt suspending a l l payments. These defaults: sent c a p i t a l f l e e i n g t o the United S t a t e s causing the d o l l a r t o r i s e and i n t e r e s t r a t e s t o f a l l i r r e s p e c t i v e of Fed p o l i c y . P o l i t i c a n s o n ly viewed the r i s e i n the d o l l a r and responded w i t h p r o t e c t i o n i s m - Smcot-Hawley i n June 1930 d e s t r o y i n g i n t e r n a t i o n a l trade and sending the economy back i n t o a f e u d a l s t a t e o f economic dark ages. Had there been the understanding of the " f l i g h t t o q u a l i t y " t h a t can emerge f o r a host of i n t e r n a t i o n a l reasons t h a t swamp the domestic c o n d i t i o n s , perhaps there may have been some hope.

The 1987 Crash was caused by the formation of the G-5 i n 1985 and the p e r s i s t e n t t a l k about lowering the value o f the d o l l a r by 40% t o reduce the trade d e f i c i t . The Japanese, who'had bought up t o 33% or so o f the n a t i o n a l debt and loads o f r e a l e s t a t e l i k e R o c k e f e l l e r P l a z a i n New York, were being t o l d i n d i r e c t l y that-whatever investments they made were going t o be devalued by 40%. The 1987 c r a s h took p l a c e w i t h everyone befuddled because there was no change i n the domestic fundamental c o n d i t i o n s of the economy o r corporate, earnings. The f l i g h t Of c a p i t a l by the Japanese caused by the G-5, l e d t o the c a p i t a l c o ncentration i n Japan w i t h f o r e i g n i n v e s t o r s l o o k i n g a t a r i s i n g yen £ assets c r e a t i n g the 1989 high. 3

Another example i s a mincl t w i s t e r . Between 1980 and 1985 I was g i v i n g l e c t u r e s throughout Europe. The number one q u e s t i o n T was asked? What was my o p i n i o n of the United States adopting a t w o - t i e r currency system? I understood the question only because I s t u d i e d money g l o b a l l y and had a l s o c l i e n t s from South A f r i c a when there was the Hand and the ''Financial -Randy"--One currency i s used; don^tica-lly,-^but-It-canriot-be-HseQV-fQr any purchase o f goods & s e r v i c e s o u t s i d e the country. The rand toould need t o be converted t o the " F i n a n c i a l Hand" t h a t was allowed t o be used e x t e r n a l l y c r e a t i n g the t w o - t i e r system. The Euro-Dollar market had h i t $1 t r i l l i o n n e a r l y i n 1980 as d i d the US n a t i o n a l debt. ;Europeans were convinced the way t o escape the deht was f o r the US t o c r e a t e a t w o - t i e r currency. This l e d them t o move t h e i r E u r o - C o l l a r deposits .into onshore domestic d o l l a r d e p o s i t s . They had assumed th a t the E u r o - d o l l a r s would be new " b l u e " d o l l a r s worth l e s s than the domestic "green" d o l l a r s . The more convinced the r i s k was perceived, the more c a p i t a l flowed. The Euro-Dollar d e p o s i t s d e c l i n e d s h a r p l y and t h i s drove the d o l l a r t o record highs i n 1985. The more b e a r i s h ' Europeans became, the more b u l l i s h the d o l l a r trend. T h i s was amazing t o see. Government misunderstood c r e a t i n g the G-5 i n ;1985 announcing they wanted t o see •.. the d o l l a r d e c l i n e by 40%. The Japanese began t o s e l l US investments t a k i n g c a p i t a l back causing the yen t o r i s e a t t a c h i n g others c r e a t i n g a bubble top.

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

The t r a d i t i o n a l Hicardo model of comparative ; advantage was b u i l t upon a world when gold was money, We must r e a l i z e t h a t p r i o r t o 197T w i t h o n l y b r i e f exceptions, the c a p i t a l flowed only because o f a comparative advantage r e f l e c t e d i n investment r a t e s of r e t u r n , t o g a i n goods t h a t were not a v a i l a b l e i n the domestic economy, o r f o r a r b i t r a g e i n s o f a r as the same produce a v a i l a b l e i n one n a t i o n was cheaper when compared t o domestic p r i c e s , then trade i n t e r n a t i o n a l l y would take place e x p l o i t i n g those d i f f e r e n t i a l s t h a t was an e a r l y form of g l o b a l a r b i t r a g e .

However, we are no longer i n a world o f a g o l d standard where money i s the same r e l a t i v e i n t e r n a t i o n a l l y . Gold might buy more goods i n one n a t i o n than another, but i t i s the d i f f e r e n t i a l i n the p r i c e of goods r e l a t i v e t o the same amount o f g o l d t h a t f l u c t u a t e s due t o other e x t e r n a l f a c t o r s - l a b o r & t r a n s p o r t a t i o n c o s t s . Today, a f l o a t i n g exchange r a t e system has a l t e r e d t h a t time honored t r a d i t i o n and t h i s a f f e c t s every economic theory rendering them i r r e l e v a n t .

(1 ) c a p i t a l may now move according t o the o l d p r i n c i p l e s of trade and seek an a r b i t r a g e t o purchase the same goods cheaper i n another l a n d t h a t has a comparative advantage such as lower l a b o r c c s t s , l i t t l e or no tax r a t e s , or on seme occasions d e l i b e r a t e p r i c i n g , .below cost t o g a i n market share- ( r a r e event) _

(2) c a p i t a l may a l s o move s o l e l y because of currency f l u c t u a t i o n s , o r d i f f e r e n t i a l s i n i n t e r e s t r a t e s such as the c a p i t a l outflows from Japan t o gain.the higher r a t e s o f i n t e r e s t i n d o l l a r s , where no such comparative advantage e x i s t s s o l e l y due t o t r a d e , but the c a p i t a l flows due t o currency may i n f a c t a l t e r the t r a d e balance.

Where under our f i r s t Law c a p i t a l flows t o a v o i d g l o b a l r i s k , here we f i n d i n the calm of the storm, c a p i t a l w i l l f l o w purely according t o the a r b i t r a g e i t sees i n v a l u e s . This i s what H i l t o n Friedman advocated back i n 1953. He saw t h a t t h i s n a t u r a l f l o w would place a check and balance upon governments. I n r e a l i t y , t h i s i s the manner i n which c a p i t a l a l s o votes r e l a t i v e t o the p o l i t i c s of a n a t i o n . We are no longer i n Qz. C a p i t a l w i l l f l o w not because o f s o l e l y the comparative advantage i n t r a d e , but i n the value of money i t s e l f . They can a t tunes both b e ' a r b i t r a g e .

The New Practical "Laws" j of Global Economics

There are e t h e r "Laws" th a t now e x i s t a l s o w i t h i n our new G l o b a l Economy, However, l e t -us s t i c k t o these' f i r s t two Laws for. they alone a l t e r every theory i n ecorrrnics t o date. The " p r a c t i c a l " s i d e o f these two r e a l i z a t i o n s i s t h a t the e n t i r e f i e l d of economics changes much l i k e what G a l i l e o d i d t o dogma- I f the planets r e v o l v e around the sun r a t h e r than the sun around the p l a n e t , then where i s up and where i s down? Tr a n s l a t e t h i s i n t o heaven and h e l l , and you can see why he was imprisoned f o r l i f e . '

Suddenly, how we manage our economy i s no longer autonomous. The theory o f chaos you might r e c a l l was explained t h a t the f l a p o f the wings o f a b u t t e r f l y i n A s i a Could s e t i n motion changes to the winds i n the Americas. Although extreme, the p r i n c i p l e remains the same - k i n d of L i k e a s c i - f i movie - "We are not alone*" Indeed, the a c t i o n s o f one w i l l have an impact upon a l l o t h e r s . We cannot escape the consequences o f our own a c t i o n s - I t i s j u s t i i i j j a s s i b l e .

I n my g l o b e - t r o t t i n g running between natlona and g e t t i n g t o see f i r s t hand what was baking place,, my eyes opened l i k e never before. T h i s i s what M i l t o n perhaps saw i n me before I myself r e a l i z e d the f u l l scope o f what I had f a l l e n i n t o . They d i d not teach g l o b a l c a p i t a l flows i n s c h o o l . They d i d not even teach hedging and f l o a t i n g exchange r a t e s . T h i s was a f i e l d t h a t j u s t emerged more a k i n t o being an apprentice. But what 1 observed g l o b a l l y was the grand I n v i s i b l e Hand o f Sdam Smith (1723-1790), y e t on an i n t e r n a t i o n a l l e v e l . The image i n my mind was each n a t i o n formed a gear i n one g i a n t machine we c a l l the economy o f nations. Turn one, and t h e r e M i l l be an e f f e c t i n a l l o t h e r s . We a r e a l l connected.

How do we c r e a t e a p r a c t i c a l theory? K a r l Marx (1818-1883) saw the c o l l a p s e i n c a p i t a l i s m as a c l a s s s t r u g g l e between l a b o r and employer assuming the l a t e r would e x p l o i t l a b o r t o the p o i n t they could no longer consume. He ignored Smith and paid no mind t o money supply and the boom bust economic c y c l e . He destroyed (1) personal l i b e r t y p l a c i n g i t i n the hands o f government f o r the greater-good, and (2) ignored the s e l f - i n t e r e s t o f the s t a t e t o a l s o expand i t s personal power. I t was Ivan IV (1533-84) "the T e r r i b l e " who s e i z e d land of h i s enemies, and_gave i t t o h i s supporters y e t r e a l i s e d i f the workers l e f t , the l a n d became worthless. He enacted a law t h a t t h e workers (serfa] could not l e a v e l a y i n g the seeds f o r the Russian r e v o l u t i o n i n 1917. C l e a r l y , other r u l e r s saw the problem, but d i d riothing t o c o r r e c t i t . Alexander I (1777-1825) came t o power i n 1801 and spoke about reform, but then Napoleon invaded p u t t i n g an end t o t h a t p o s s i b i l i t y . So Marx was wrong. I t was not l i m i t e d t o employers, but could a l s o be the s t a t e t h a t i n f a c t e x p l o i t e d the people. Handing a l l the assets t o the s t a t e and d e s t r o y i n g the l i b e r t y o f i n d i v i d u a l s , was not the answer. To f i x what i s wrong, r e q u i r e s a c l e a r working knowledge o f what we are t r y i n g t o f i x , " Bad t h e o r i e s and assumptions have le d to the deaths of m i l l i o n s . We need " p r a c t i c a l " economics - not t h e o r i e s .

Xff Times L i k e The Present Should F o l l o w Keynes o r Friedman? or Do Wg. freed a New Theory Altogether?

un<3^g^gj^j^g_Kgygg^ and Friedman mayjnean the di f f e r e n c e _ between s u r v i v a l or econorc^ d e s t r u c t i o n t h a t leads always t o war,. The fibrietarists "ac^sed'Keyne~s " o f i g n o t f i ^ g money. Th i s i s t r u l y a c r i t i c a l p o i n t t h a t must be understood. By advocating two t o o l s i n t e r e s t r a t e s and taxes, Keynes i s approaching the economy i r j d i r e c t l Y " o t h e r needs, t o s t o p scan behavior the government dries not l i k e i n you, i t i s d i r e c t l y a t t a c k i n g your w i f e i n hopes she w i l l cause a change i n your behavior. Japan was i n a very bad economic depression. Tt lowered i n t e r e s t r a t e s t o * tenth-of-one percent (0.1%), i t was v i r t u a l l y zero. A l l t h i s d i d was causa c a p i t a l t o seek i n t e r e s t r a t e p r o f i t s elsewhere and d i d nothing t o r e l i e v e the economic downturn i n Japan. The f i n a l low may come i n 2009 a f t e r the 1989 hig h , w a i t i n g f o r a p o s s i b l e low 20 years l a t e r , i s not acceptable f i s c a l p o l i c y . . Economic d e c l i n e s can he very prolonged. From the 1873 Panic i n the United S t a t e s , t h e economic d e c l i n e l a s t e d o v e r a l l u n t i l 1896 - 23 years l a t e r . That i s a waste of g e n e r a l l y 1/3rd o f everyone's l i f e t i m e -

Tfie M o n e tarists' approach i s t o increase the money supply, not use i n d i r e c t means t h ^ t hope w i l l change events. Tf we simply gave everyone $1,000, 'there i s no guarantee t h a t they would spend i t . I f t h e i r confidence i s s t i l l d i s t r u s t i n g , they may 3°st pocket the money w a i t i n g f o r a r a i n y day. T h i s would not i n c r e a s e the mmeY supply f o r t h a t we measure t r u l y i n terms o f v e l o c i t y , i f we c o l l e c t i v e l y add up Che economy i n what we c a l l the Gross Domestic Product {•"a^P"), and we d i v i d e t h a t by the money supply, we achieve what i s known as the turnover r a t e ( V e l o c i t y ) • I f the money supply d i v i d e d i n t o QDP creates a v e l o c i t y r a t e of 6:1, t h i s me^1 1 0 the " f l o a t " o r h o l d i n g p e r i o d before spending i s about 2 months. I f we in c r e a s e t h a t r a t e t o 12:1 the time p e r i o d drops t o 1 month. We d e f i n e Ml money supply fl^I

(1) the amount Of currency h e l d o u t s i d e hanks (2) the checking accounts a t commercial banks (demand deposits)

ThiS i s a very narrow view o f money, i t does- not i n c l u d e s t o c k s , bonds, and r e a l e s t a t e - three major areas where c a p i t a l can r e s i d e and i s considered t o be "wealth* 1 every r a t i o n a l person. Where problems a l s o enter i s the assumption o f a pe x f e c t - w o r l d . I f the v e l o c i t y i s constant, then i f the c e n t r a l bank can t r u l y manipulate the money supply ( v e l o c i t y ) , they would have a d i r e c t t o o l t h a t i s f a r b e t t ^ T t h a n i n t e r e s t r a t e s and taxes. However, i f the v e l o c i t y can f l u c t u a t e w idely ^ c c u r d i n g t o the "confidence" of the people, then manipulating the money supply W0"ild a l s o be reduced t o an i n d i r e c t t o o l . ; Here i s where the for c a s o f Keynes Friedman c l a s h . Keynes argues t h a t the v e l o c i t y i s unstable, whereas Friedman would take the opposite p o s i t i o n .

The oebate about money may be the t h i r d o l d e s t p r o f e s s i o n . P r i o r t o about 600 BC, rt^ney traded i n clumps o f s i l v e r and g o l d and i n some areas o f I t a l y i t took the f o r m ^ c a t t l e and l a t e r bronze. Every time there was a t r a n s a c t i o n , the metal h&d to be t e s t e d and weighted- King Croesus of L y d i a (ca 560-546 EC) {Turkey) came up w i t h the idea t h a t he would p r e - t e s t and pre-weigh g o l d c r e a t i n g the f i r s t coinage. Other kings q u i c k l y caught on and i t became a sweeping new t r e n d of a show o f power and wealth. Economically speaking, i t was o step toward making c o n m e r c e ^ e f f i c i e n t and thus increased progress and the v e l o c i t y of money. Trade expanded a r ^ the age of empire b u i l d i n g followed s h o r t l y t h e r e a f t e r . I t was Money i n t h e form o f a standard u n i t o f exchange t h a t f u r t h e r e d i n t e r n a t i o n a l t r a d e . The r e f e r e n c e t o Jesus overthrowing the tables a t the Temple s t a t e s they were the t a b l e s o f the "iflOney changers" John 2:15, who i ^ r e the anc i e n t f o r e i g n exchange d e a l e r s .

The i n v e n t i o n of money brought w i t h i t the n a t u r a l consequence o f the i n e v i t a b l e c o u n t e r f e i t i n g . However, c o u n t e r f e i t i n g has never r e s u l t e d i n widespread i n f l a t i o n even when used f o r the m i l i t a r y purpose'of undermiruug the currency of one's opponent used by England against the American c o l o n i e s d u r i n g the Rev o l u t i o n as w e l l as du r i n g tftf I I , The s i n g l e g r e a t e s t t h r e a t t o the money supply has always come from the i s s u i n g government i t s e l f . "

The above c h a r t i l l u s t r a t e s the metal content o f the Roman Monetary System. I t was the steady debasement o f the s i l v e r content o f the Roman Denarius t h a t f i n a l l y l e d t o an a l l out c o l l a p s e d u r i n g the T h i r d Century AD, For c e n t u r i e s , governments have sought t o expand t h e i r money supply by debasing the currency. I n Other words, reducing the content o f precious metals t o enable the same amount Of g o l d and s i l v e r t o create more coinage. The economic advisor t o Queen E l i z a b e t h I C o r r e c t l y observed the response t o such p r a c t i c e s among the po p u l a t i o n . I t was

one Of the e a r l i e s t Economic Laws e s t a b l i s h e d - Bad money d r i v e s good mcney out Of c i r c u l a t i o n - s i r Thomas Gresham (1519-1579 AD). H i e economic hardships t h a t E l i z a b e t h faced d u r i n g her r e i g n between 1533 and 1603 i n c l u d i n g the defeat o f the Spanish Armada, put great econcmic pressure t h a t was seen i n the debasement of coinage. Indeed, Gresham" s Law proved t o be c o r r e c t d u r i n g the 1960s when s i l v e r was taken out of modern coinage being replaced w i t h n i c k e l and copper. The s i l v e r coins q u i c k l y disappeared and were worth a premium t o the "bad" money t h a t entered the world economies.

The n o t i o n about watching the money has been around f o r a long time - f a r longer than Keynes i a n theory. H i e famous economist o f the Great Depression era I r v i n g F i s h e r (1867-1947) d e r i v e d a formula i n 191T i n s p i r e d by John S t u a r t H i l l ' s a n a l y s i s c r e a t i n g the "quan t i t y theory" of money.being MV • PQ. The "V" i s the v e l o c i t y o f "M" money supply where the "PQ" represents G)P f f P " being the p r i c e l e v e l , and "Qn being the q u a n t i t y o f goods & s e r v i c e s produced). T h i s equation Can be reduced t o e x p l a i n the Monetarist theory i n i t s most s i m p l i s t i c form, t h a t a manipulation of "M" (monev suoolv) w i l l c r e a t e a d i r e c t a f f e c t i n "P" ( p r i c e s ) t h a t we i n s t i n c t i v e l y view as " i n f l a t i o n " d e f i n e d as (too much money chasing too few goods). H i s t o r i c a l l y , i t was always the supply of money and i t s q u a l i t y t h a t had the impact upon the economy of mankind.

The Monetarists maintain t h a t an, increase i n government spending w i l l not d i r e c t l y a f f e c t p r i c e s unless i h e mcney e-ppiyaLao c^ar.gasJ T h i s i s a very ^ r i ~ r ; a l p o i n t t o keep I n mind. People g e n e r a l l y assume th a t a d e f i c i t i n spending w i l l be- d i r e c t l y i n f l a t i o n a r y . We must r e a l i s e t h a t the go l d standard i s dead- What we even d e f i n e as "money" w i t h i n Hi e f f e c t s our e n t i r e concept of how t o manage the econcmy as a whore.---If b o n d s - a r e - ^ Q t — p ^ t - Q ^ ^ e H ^ n e i t h e r would d e r i v a t i v e s on such products. These ideas are o b v i o u s l y wrong i n the f a c e o f our current c r i s i s . Under Ml, d e r i v a t i v e s do not e x i s t .

He do not l i v e i n a p u r e l y Keynesian world. The F e d e r a l Reserve does i n f a c t seek t o manipulate the money supply as p a r t of i t s t o o l s . F i r s t , there i s the discount r a t e where i t lends money t o the banks t h a t i n t u r n l e n d money i n t o the economy i n normal c o n d i t i o n s when not covering l o s s e s i n a c r i s i s . I f the Fed r a i s e s o r lowers the r a t e o f i n t e r e s t , i t w i l l i n 'theory a f f e c t the len d i n g of the banks by reducing t h e i r borrowings by r a i s i n g r a t e s h i g h e r . But i f the debt c r i s i s i s causing a c o l l a p s e , then people w i l l pay higher r a t e s t o s t a y a f l o a t . Therefore, we must be c a u t i o u s about making too many assumptions based upon the p e r f e c t w o r l d . T h i s can d i r e c t l y increase o r decrease the money supply through the l e n d i n g t o banks, but i t i s not a. l i m i t a t i o n upon the borrowing t h a t i s being employed as the t o o l , i t is the i n d i r e c t e f f o r t t o a f f e c t demand by i n t e r e s t r a t e s .

Second, the money supply i s more d i r e c t l y manipulated by the buying and s e l l i n g of Government bonds. The Fed can increase the money supply as def i n e d by Hi through buying Government bonds from the p u b l i c i r r j e c t i n g t h e r e f o r e cash. I t can reduce money supply by s e l l i n g Government bends i n t o the market t a k i n g i n excess cash.

These assumptions are what were taught i n s c h o o l , but guess what? They are wrong I T h i s e n t i r e model i s based upon the assumption of a go l d standard and a r e l a t i v e l y c l o s e d economy. L e t us say th a t the Fed d e s i r e s t o s t i m u l a t e the economy SO i t i n c r e a s e s the money supply i n theory by buying Government bonds. T h i s would work assuming the s e l l e r t o the Fed i s a l o c a l r e s i d e n t . I f China decided t o s e l l US bonds i t holds because i t suddenly needs cash, the Fed purchase w i l l not then s t i m u l a t e t h e (Infill l< eomomy a t a l l f o r the money i n j e c t e d i n t o the system i s headed t o China- Hence, an increase i n money supply i s not always i n f l a t i o n a r y I

Our d e f i n i t i o n o f money i s f a r too narrow i n a F l o a t i n g Exchange Rate System. I f we look a t a piece o f r e a l e s t a t e t h a t changes : hands f o r $1 b i l l i o n and one American s e l l s i t t o another, the net e f f e c t i n the money supply i s zero. However, i f Japan enters and buys t h a t same piece o f r e a l e s t a t e , they b r i n g yen, convert i t t o d o l l a r s , and now one American has $1 b i l l i o n i n h i s pocket t h a t d i d not e x i s t p r e v i o u s l y ! M i l t o n may not have witnessed what I have seen f i r s t hand, but he saw t h a t the p o s s i b i l i t y e x i s t e d where changes i n the supply of money d i d not e f f e c t merely p r i c e s i n the i n f l a t i o n a r y model, but economic a c t i v i t y . That has come back t o haunt us i n a F l o a t i n g Exchange Rate System t h a t goes f a r beyond what M i l t o n envisioned back i n 1953.

The Monetarists assumed th a t v e l o c i t y was s t a b l e and thus an increase i n money supply would r e s u l t i n gr e a t e r spending of the e x t r a cash on goods and s e r v i c e s causing Q£> t o r i s e . The Fed could slow the growth r a t e b y s e l l i n g bonds t a k i n g cash out o f the system. But these assumptions are not r e a l , f o r the v e l o c i t y can and w i l l change depending upon ''confidence" and i n a F l o a t i n g Exchange Rate System the Fed cannot d i r e c t l y be sure i t i s p u t t i n g money i n t o o r t a k i n g out of the system when t h e r e are f o r e i g n holders of debt. The model begins t o decompose under our new dynamic g l o b a l economic system.

Keynes disagreed w i t h the Monetarist's Uew that money s u p p l y was the key. Keynes a c t u a l l y began w i t h a focus upon money supply and evolved i n t o the p o l i c y theory of i n t e r e s t r a t e s and tax manipulation, whereby M i l t o n began w i t h the Keynesian model and r e v e r t e d back t o study money supply concluding t h a t Keynes would create massive new spending t h a t would only l e a d t o i n f l a t i o n . Was he c o r r e c t ?

Keynes bought i n t o the money supply model a f t e r viewing the hyper i n f i a t i f ^ _ cif" rnenSerinan Weimar Republic between f921~and'"i 924 T Keynes viewed i n ' h i s T r a c t on" " Monetary Reform t h a t i t was the increase i n the q u a n t i t y o f money t h a t caused the population t o spend money f a s t e r t h a t i n t u r n l e d t o e s c a l a t i n g p r i c e adanvances. However, Keynes f l i p p e d p o s i t i o n s a f t e r the Great Depression i n h i s General Theory he b e l i e v e d i t was a c o l l a p s e i n demand r a t h e r than money supply, t h a t l e d him t o h i s t o o l s of i n t e r e s t r a t e s and taKes. Keynes saw no reason why the v e l o c i t y o f money would remain s t a b l e . Keynes was not sure t h a t a mere i n c r e a s e i n money supply would t r a n s l a t e i n t o more spending o f excess cash. He recognized t h a t an in c r e a s e i n money supply may not produce an i n c r e a s e i n v e l o c i t y f o r people could s t u f f i t i n t h e i r mattresses, and thus the d e c l i n e i n v e l o c i t y would negate the in c r e a s e i n money supply. Keynes a l s o argued t h a t others may hoard cash t o a l s o speculate i n stocks or bonds. Keynes thus saw th a t i n t e r e s t r a t e s c o u l d e f f e c t the s p e c u l a t i v e demand and i n h i s mind had a more d i r e c t e f f e c t than money supply concluding t h a t a i n c r e a s e i n money supply might be o f f s e t by a i n c r e a s e i n hoarding. Keynes thus took the a n t i - M o n e t a r i s t p o s i t i o n i n a l e t t e r a d v i s i n g P r e s i d e n t F r a n k l i n D. Roosevelt;

"Seme people seem t o i n f e r ... th a t output and -~xme can be r a i s e d by i n c r e a s i n g the q u a n t i t y o f money. But t h i s i s l i k e t r y i n g t o get f a t by buying a l a r g e r b e l t . I n the U n i t e d States today your b e l t i s pl e n t y b i g enough f o r your b e l l y . 1 1

The C o l l e c t e d W r i t i n g s of John Maynard Keynes (Vol XXI^ p294) London; Macmillan/St. Martin's Press f o r the Royal Economic S o c i e t y 1973

Roosevelt took the money approach by (T) c o n f i s c a t i n g a l l g o l d , and (2) he then devalued the d o l l a r o f f i c a l l y i n c r e a s i n g the supply o f money r e l a t i v e to gol d by r e v i s i n g the system from $20 f o r an ounce of go l d t o $35. Th i s d i d not have the widespread e f f e c t t h a t he perhaps s e c r e t l y b e l i e v e d - Roosevelt a l s o made i t i l l e g a l , f o r Americans t o own -gold. That was not over r u l e d u n t i l 1975. I t was presumed th a t i f the p u b l i c could s t i l l hoard g o l d , they would do so, and defeat the be s t e f f o r t s t o i n f l a t e . There was something l u r k i n g i n the bushes th a t was a l s o the s i l v e r l i n i n g i n the dark clouds o f the Great Depression. I t was nature and her 7 year drought of B i b l i c a l proportions as i n the s t o r y o f Joeseph. The Great Depression f o r c e d a new age of progress by n e c e s s i t y - the new age of s k i l l e d l a b o r f u l f i l l i n g the culmination of the I n d u s t r i a l R e v o l u t i o n .

Keynes thus viewed the world e n t i r e l y d i f f e r e n t l y . Keynes saw t h a t the economic f o r c e s of production were motivated through i n t e r e s t r a t e s and investment r a t h e r than consumption. Keynes was perhaps too deeply i n v o l v e d i n h i s p e r s o n a l world of investment t o see the other s i d e of the s t r e e t . Keynes b e l i e v e d t h a t t o get GDP t o r i s e , i n t e r e s t r a t e s had t o be lowered t h a t would s t i m u l a t e borrowing from banks t o buy the goods and s e r v i c e s - Thus, he saw the Great Depression as a c o l l a p s e i n t h i s demand.

Keynesian economics has been proven t o be f a l s e j u s t l o o k i n g a t the d e c l i n e i n Japan. The i n t e r e s t r a t e s t h a t f e l l t o n e a r l y zero d i d nothing t o r e s t a r t .demand and because of the F l o a t i n g Exchange Rate System, there was an escape valu e - the a b i l i t y t o borrow yen f o r next t o nothing and i n v e s t i t overseas e a r n i n g 600% more and t h a t would have no e f f e c t upon s t i m u l a t i n g domestic demand. By the 1950s, M i l t o n had moved away from Keynesian ideas he harbored i n the 1940s viewing t h a t i g n o r i n g the money supply was a serious e r r o r .

M i l ton broadened h i s view t o support the idea t h a t the demand f o r money and v e l o c i t y was s t a b l e by t u r n i n g t o the long-term f a c t o r s of education, h e a l t h and income of the f a m i l y o r i n d i v i d u a l over decades - the saving f o r retirement approach-M i l t o n a l s o attacked Keynesian ideas t h a t consumption rose and f e l l along w i t h the short-term income. H i l t o n argued t h a t people took a longer-term view t o t h e i r l i f e and f i n a n c e s . H i l t o n was c o r r e c t , f o r there would be no market f o r L i f e Insurance

" i F ' f f i ^ i e ^ T o i H i h ^ viewed t h a t consumption would be a l s o s t a b l e f o r t h e long-term expectations o f the f a m i l y or i n d i v i d u a l -

i I f we look a t the events of the Great Depression, i t i s hard t o see how

Keynesian economics would have r e a l l y worked, i n t e r e s t r a t e s c o l l a p s e d foe three primary reasons w i t h no economic e f f e c t ; (1) the Fad d i d lower r a t e s , (2) there was a f l i g h t t o q u a l i t y f o r c i n g short-term r a t e s to near zero as we have seen r e c e n t l y , and (3) there was c a p i t a l f l i g h t from Europe d u r i n g the e a r l y stages due t o the widespread d e f a u l t s o f European government debt t h a t a l s o impacted domestic p o l i c y f o r c i n g i n t e r e s t r a t e s lower even i f the Fed d i d not want t o see such a decline.- The Fed could not lower i n t e r e s t r a t e s t o s t i m u l a t e the economy. That w i l l o n l y help d u r i n g b u l l markets where there i s "confidence" t o i n v e s t f o r a p r o f i t i n any event. Lowering taxes d i d not r e a l l y matter because there was no p a y r o l l tax u n t i l a f t e r World War I I and the r i c h were l o s i n g money p r o f u s e l y . I f i n d i t hard a f t e r j u s t r e a d i n g the memiors of Herbert Hoover and the s e r i o u s documentation a v a i l a b l e t o prove t o me t h a t Keynes would have helped- The massive runs on banks took p l a c e on rumors t h a t FES was going t o c o n f i s c a t e g o l d . He denied that as absurd the n i g h t of the e l e c t i o n . But the rumor p e r s i s t e d and l e d Co Tiassive bank runs. Hoover c o u l d not stop i t f o r i t was not a " c r e d i t " c r i s i s as much as i t was a sheer f l i g h t t o q u a l i t y . The m a j o r i t y of banks f a i l e d a f t e r the e l e c t i o n of FDR and h i s inauguration. Hoover wrote l e t t e r s t o FDR p l e a d i n g w i t h him t o reassure the people he had no such plan- But FDR remained s i l e n t . Had the Fed provided cash loans t o the banks, i t would have been f r u i t l e s s .

H i l t o n viewed the Great Depression from a money p e r s p e c t i v e . He was c o r r e c t , the f e a r s and u n c e r t a i n t y o f the times l e d t o b o a r d i n g o f g o l d . T h i s no doubt co n t r i b u t e d t o what H i l t o n saw as a c o l l a p s e of o n e - t h i r d of the money supply during the Great Depression. I t i s hard t o imagine premising t o lower taxes and i n t e r e s t r a t e s would have much impact when the world seems t o be ending..

I b e l i e v e i t was Abe L i n c o l n who argued t h a t you can f o o l seme o f the people some of the time, but you cannot f o o l a l l of the people a l l o f the time. T h i s i s c l e a r l y a l e s s o n p o l i t i c i a n s need t o l e a m . The people do look t o the f u t u r e and w i l l spend more of t h e i r income i f they " f e e l " t h a t t h e i r home i s r i s i n g i n v a l u e . When housing p r i c e s d e c l i n e , savings r i s e , because people do i n f a c t respond t o t h e i r longer-term e x p e c t a t i o n s . T h i s b r i n g s us t o the q u e s t i o n of tax cuts and do they even work? i n T964, a tax c u t was made and t h i s was viewed as a permanent cut In p a y r o l l taxes. The economy exploded and there was the great boom i n mutual funds t h a t l e d t o w i l d s p e c u l a t i o n with the high i n 1966. By the time we see the c o l l a p s e , there was f e a r about i n f l a t i o n due t o the spending f o r the Vietnam War. i n I960 Congress passed what i t marketed as a temporary tax surcharge t o stop i n f l a t i o n . True, consumers spent l e s s , but they drew down savings t o maintain t h e i r consumption, i n 1975, there was then a temporary tax rebate t o s t i m u l a t e the economy going i n t o the steep d e c l i n e f o r 1976. Hone of these changes i n temporary taxes d i d anything s i g n i f i c a n t . Where the 1964 p a y r o l l t a x c u t took p l a c e and was perceived as permanent, there we f i n d a surge of investment p l a n n i n g f o r the long-term as Friedman expected.

The e m p i r i c a l evidence suggests t h a t one-time rebates w i l l not s t i m u l a t e the economy because the people are q u i t e f r a n k l y - not s t u p i d ! The o n l y h i s t o r i c a l evidence o f a tax c u t s t i m u l a t i n g the economy i s a permanent change not one-offs*

We are not concerned with the absurd arguments that the average person does not weigh the budget d e f i c i t when he i s buying eggs- These s o r t s o f c r i t i c i a n s malign the i n t u i t i v e nature of the people as a whole- For example, when P a u l Volker r a i s e d i n t e r e s t rates t o unheard of l e v e l s t o f i g h t i n f l a t i o n i n the e a r l y 1980s, my mother and her s i s t e r r an out and bought CDS f o r 10 years a t f a h ^ ' w i f h - i n t e r e s t r a t e s " o f about 15 percerTrT She did not _ask"7ne"~anyadvtcn— She i n s t i n c t i v e l y knew t h i s was a deal of a l i f e t i m e . For the next decade, they made a fortune- D i d they weigh i n f l a t i o n r e l a t i v e t o the i n t e r e s t r a t e ? Perhaps. But they c l e a r l y d i d not see i n f l a t i o n as r i s i n g f a s t e r than the r a t e o f i n t e r e s t o r they would have h e s i t a t e d as was the case d u r i n g t h * German H y p e r i n f l a t i o n . Did they have a model? Wo! D i d they make some i n s t i n c t i v e d e c i s i o n based upon nersonal o b s e r v a t i o n without e m p i r i c a l data? A b s o l u t e l y . Sorry, t r y i n g to impute knowledge t h a t must be somehow q u a n t i t a t i v e on a p r o f e s s i o n a l l e v e l t o the general p u b l i c , makes no sense. Sometimes we f o r g e t , that i f aiongh l i t t l e old l a d i e s r u n o a t and s h i f t their demand d e p o s i t s t o long-term f i x e d rates, they do cause a c o n t r a c t i o n i n Ml as we c a l c u l a t e our world-

M i l t o n was c o r r e c t - Keynesian models promote i n f l a t i o n w i t h no o b j e c t i v e . They are i n d i r e c t and may assume t h a t an i n c r e a s e i n government spending w i l l be i n f l a t i o n a r y , but •this i s j u s t not always t r u e , i f there" a r e ' e x t e r n a l f a c t o r s t h a t are o f f s e t t i n g the spending such as a c a p i t a l withdrawal from o u t s i d e the domestic economy. The assumption t h a t even w i t h i n a c l o s e d economy t h a t an inc r e a s e i n spending w i l l c r eate econcmic growth of a t a n g i b l e nature i s a l s o f a l s e - j u s t look a t the German H y p e r i n f l a t i o n . We saw the p e r i o d of the 137B start of i n f l a t i o n d e l i b e r a t e l y c reated and targ e t e d to increase .the money supply by overvaluing s i l v e r r e l a t i v e t o g o l d , f a i l e d t o produce the expected r e s u l t f o r g o l d was being drained by f o r e i g n i n v e s t o r s r e p l a c i n g i t w i t h s i l v e r u n t i l the e n t i r e experiment, led to J.P Morgan having to b a i l o u t the n a t i o n l e n d i n g the US Treasury g o l d . The d e l i b e r a t e c r e a t i o n of money that was cheaper t h a n the w o r l d standard, l e d not to econcmic growth, but economic d e c l i n e i n a s i m i l a r f a s h i o n t o the German H y p e r i n f l a t i o n o f the 1920s, but to a much l e s s extent-

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

While Gresham's Law was based upon a Gold Standard and t h a t by debasing-the p recious metal content causes the hoarding o f higher content coinage, i n a f l o a t i n g exchange r a t e system, i t s t i l l works by d r i v i n g r e a l wealth out of a n a t i o n f l e e i n g t o another currency by c r e a t i n g excess currency.

Law #4 Only Permajynt Reductions i n Taxes Produce F<r.-rv*iiic Stimulatior.

The average person may not understand fancy s t a t i s t i c s , but they w i l l a l s o not be induced by f a l s e s t a t i s t i c s . The average person r e a c t s according t o t h e i r own personal view of the economy, which i s why one-off t a x reductions w i l l not have an economic impact but w i l l be hoarded f o r the r a i n y day unless the average person "sees'* and "expects 1' econcmic changes.

i n t e r e s t Rates - Taxes - Money Supply 5o i s t h a t the Best We have Got?

As much as I respect M i l t o n Friedman, I must be honest. There are no p l a i n assumptions t h a t we can t o l e r a t e . We cannot assume th a t v e l o c i t y w i l l remain a constant because people w i l l hoard and f e a r spending in times of econcmic d e c l i n e . L i k e w i s e , l e t us not kid ourselves t h a t r a i s i n g and lowering i n t e r e s t r a t e s w i l l have any meaningful e f f e c t upon the economy o r the behavior o f i t s p a r t i c i p a n t s .

S e t t i n g a s i d e the accolades, the government could not h e l p but lower i n t e r e s t r a t e s d u r i n g an economic d e c l i n e . C a p i t a l w i l l f l e e t o government debt as long as i t perceives the r i s k t o be i n the p r i v a t e s e c t o r . Hence, c a p i t a l w i l l move t o the government debt b i d d i n g higher i n p r i c e f o r c i n g y i e l d s { i n t e r e s t r a t e s ) t o d e c l i n e . So Keynesian theory does not work. I t i s assuming government has

" "seme"effect when i t i s n ~ 6 t ~ ~ i n 7 " t f i e ' ^ i V e r ^ e a t ^ I r ^ i ^ K e e p s " i n t e r e s t r a t e s so- " a r t i f i c i a l l y high, p r i v a t e economic commerce w i l l c o l l a p s e and government expendit u r e s would r i s e sharply due s o l e l y t o i n t e r e s t r a t e s causing both the money supply and economy t o c o l l a p s e . Lowering i n t e r e s t r a t e s below world l e v e l s as d i d Japan i n the 1990s, f u e l s c a p i t a l f l i g h t t o higher y i e l d s preventing domestic increases i n money supply d e f e a t i n g any intended s t i m u l a t i o n package.

L i k e w i s e , i f money supply i s j u s t increased assuming i t matters not how i t i s increased o r spent, t h i s s o r t of untargeted' wholesale spending w i l l promote i n f l a t i o n causing c a p i t a l f l i g h t t o other lands. C u r r e n t l y , t h e r e are proposals t o spend money on i n f r a s t r u c t u r e - This i s a throw back t o Roosevelt and the WPA. But t h i s demonstrates how a l i t t l e - b i t o f knowledge can be dangerous. The WPA worked because unemployment rose t o 25% during the Great Depression when we were s t i l l , 40% a g r a r i a n when there was a 7 year drought known as the Dust Bowl . Government was s t i l l q u i t e s m a l l . The f e d e r a l reserve was created o n l y i n 1913 and there was the i n t e r s t a t e Commerce Commission. There was no p a y r o l l t a x and no s o c i a l s e c u r i t y . Today, the growth i n government s t a t e and f e d e r a l has become n e a r l y t h a t 40% l e v e l . More government programs may k i l l the e n t i r e goose b r i n g i n g back the good-old days and the complaints a g a i n s t Constantine the Great (306-337AD) t h a t t h e r e were more

- people c o l l e c t i n g taxes than paying them. For unemployment today t o reach 25%, i t would r e q u i r e a c o l l a p s e i n governments throughout the s t a t e s and m u n i c i p a l i t i e s . T h i s becomes p o s s i b l e because we have the f e d e r a l income t a x competing f o r revenue a g a i n s t the s t a t e and. l o c a l e n t i t i e s causing the t a x base t o c o l l a p s e .

i n our mcdern-day economy, the k i n g has no c l o t h e s , but no one w i l l t e l l him. Money i s c r e a t e d by v e l o c i t y . T h i s i s agreed upon by a l l persons. The leverage i n the banks they created w i t h t h e i r unregulated d e r i v a t i v e s markets between themselves i s a t l e a s t 30:1. Our d e f i n i t i o n of money i s f a r too narrow today. I t cannot be l i m i t e d t o demand deposits and cash. I t must i n c l u d e bonds, s t o c k s , and a l l such f i n a n c i a l instruments from money-market funds t o . d e r i v a t i v e s . I f we stop i g n o r i n g r e a l i t y , j u s t maybe we can f i g u r e out the r u l e s . I f d e r i v a t i v e s are not money, then.-what were we so st r e s s e d about b a i l i n g out bankers? I t i s not r e a l ! Right? Poof! I t ' s not there as a magic t r i c k . We have t o stop d e f i n i n g money so narrowly i f we rush t o b a i l o u t housing, banks, and manufacture but none of t h a t we consider money. So how do we f i x what we do not even d e f i n e p r o p e r l y ?

Once we accept r e a l i t y and ask the average person i f h i s house i s p a r t o f h i s assets he considers wealth, then we w i l l r e a l i z e t h a t the t r u e p i c t u r e o f money I s what people b e l i e v e i t t o be - not what economists c l a i m . T h i s i s why we are b a i l i n g o u t t f e n o r t g a g & - d e r i v a t i v e c r i s i s , because i t i s money. Hence, i f the e l e c t r o n i c money created by the p r i v a t e s e c t o r through v e l o c i t y i n c l u d e s the 30:1 leverage, we can see th a t i n c r e a s i n g the money supply t o compensate f o r the d e c l i n e i n the v e l o c i t y t h a t was e f f e c t e d by the 30:1 leverage, b r i n g s i n t o focus the problem of money supply. There i s no way t o i n c r e a s e the government spending by 30 times t o o f f s e t the d e c l i n e i n v e l o c i t y . Even i f we look a t a 10 f o l d increase, i t i s s t i l l f a r beyond what could be absorbed. T h i s type o f an increase i n money supply would be h y p e r i n l a t i o n a r y t o say the l e a s t . I t would be wide spread t h a t .everyone would be i n f l u e n c e d and c a p i t a l would then run t o t a n g i b l e assets and f l e e government debt f o r c i n g t h a t a l s o to go i n t o d e f a u l t o r j u s t be monetized.

Because we are i n a g l o b a l economy, i f the Fed buys bonds t o i n j e c t c a p i t a l i n t o the economy, those bonds may be h e l d by f o r e i g n i n v e s t o r s who take the money heme. I f we lower i n t e r e s t r a t e s so f a r , c a p i t a l w i l l f l e e t o other lands t o get the higher y i e l d as what took place i n Japan. We l i v e i n a whole new world.

The L a s t Tool Standing^

Obviously,, we cannot j u s t c r e a t e v a s t amounts o f cash and j u s t spend i t w i l d l y without c r e a t i n g a wave o f i n f l a t i o n t h a t would cause r e a l c a p i t a l and wealth t o f l e e t o other lands. We cannot a r t i f i c i a l l y r a i s e or lower i n t e r e s t r a t e s a g a i n s t the n a t u r a l t r e n d without e i t h e r causing a competing f o r c e t h a t "attracts c a p i t a l " o r " f u e l " s - t h e " " a s s e t — t n f i a t i o c n - n c j r can we~drop i n t e r e s t r a t e s or r a i s e them a r b i t r a r y t o world l e v e l s without causing c a p i t a l t o f l e e f o r higher y i e l d s o r f o r e i g n c a p i t a l t o a r r i v e t a k i n g i n t e r e s t earnings home d r a i n i n g domestic resources. I n t e r e s t r a t e s & money supply are subject t o g l o b a l trends.

T h i s i s 'why we have the New P r a c t i c a l "Laws" o f Gl o b a l Economics. We are not alone and whatever we do w i t h money supply or i n t e r e s t r a t e s can a t t r a c k or r e p e l l both domestic and f o r e i g n c a p i t a l . We cannot continue: under f a l s e assumptions. We must face r e a l i t y . Why d i d H i l t o n come l i s t e n t o me? Because where we may have disagreed on the presumption t h a t the v e l o c i t y of money was s t a b l e , we agreed on one p o i n t t h a t stands behind • these "Laws" of economics. M i l t o n saw t h a t a f l o a t i n g exchange r a t e system back i n 1953 would a c t as a check and : balance upon the governments o f the world. Many c r i t i c i z e d M i l t o n and thought he was nuts. But he was c o r r e c t * He saw i n theory i n T953 what I have witnessed i n p r a c t i c e . This i s were theory and observation have met. Whatever we do, we w i l l e f f e c t the world j u s t as the-world w i l l e f f e c t what we do. This i s perhaps i m p l i c i t i n the "contagion" t h a t people see as the debt c r i s i s spread around the globe l i k e the l a t e s t s t r a i n of f l u .

The money supply and i n t e r e s t r a t e s are t r u l y created not by the man s i t t i n g behind the c u r t a i n i n Oz. Ihey are created by the i n t e r a c t i o n o f the people and how they respond t o both p r i v a t e and p u b l i c events t h a t impact t h e i r long-term and short-terra f i n a n c i a l expectations. T h i s i s the essence of the " f l i g h t t o q u a l i t y " d i c t a t e d by the I n v i s i b l e Hand, of Adam Smith, who: wrote " i t i s not from the benevolence of the butcher ... th a t we expect our d i n e r , but from [ h i s ] regard t o [ h i s ] own i n t e r e s t . " Wealth o f Nations, V o l I , p26-27 (Oxford: Clarendon ed. 1976).

As already explained, both money supply and i n t e r e s t r a t e s cannot be confined t o p urely domestic impact. We cannot count on the "benevolence" o f f o r e i g n i n v e s t o r s o r s t a t e s t o simply buy our debt t o s t i m u l a t e our economy co n t r a r y t o t h e i r own s e l f -i n t e r e s t s . We have t o respect i n t e r n a t i o n a l c a p i t a l flows o r we w i l l send our own economy back i n t o the stone age. We cannot s t i m u l a t e domestic i s s u e s e x c l u s i v e l y by u s i n g purely i n t e r e s t r a t e s o r money supply theory by government spending.

The l a s t domestic t o o l standing i s t a x e s . Here too, we can r a i s e taxes and send c a p i t a l f l e e i n g t a k i n g w i t h i t j o b s . But we can lower taxes t o create jobs d o m e s t i c a l l y as w e l l . Taxation i s a b a r b a r i c r e l i c . o f the past t o increase the money supply of the s t a t e (king) l i k e war. are no longer on the Gold Standard so there i s no need t o t a x or wage war f o r p r o f i t when money i s e l e c t r o n i c anyway, we must d i s t i n g u i s h t h a t s t a t e a l o c a l government need t a x a t i o n because they l a c k the power t o create i t . They must l e a r n t o be competitive t o a t t r a c t j o b s , but the Feds no longer need inccane taxes. Honey can be created i n a d i s c i p l i n e d manner. M i l t o n even suggested a negative t a x r a t e t h a t was an automatic: payment t o lower income t h a t enabled a steady increase i n money supply. The p a y r o l l t a x merely borrows from: the poorest i n t e r e s t f r e e and then hands back a re f u n d as i f i t were Christmas. The 1964 tax c u t was a permanent c u t and th a t sparked economic growth. One—off tax c u t s i n t r o u b l e d times never worked because when confidence i s low, people w i l l save r a t h e r than spend f o r the f u t u r e .

The only v i a b l e t o o l we have i s the f e d e r a l income tax. The only way t o spark a econcmic boom and create j o b s , i s t o e l i m i n a t e i t and make American l a b o r competitive. The job s would pour back j u s t as Hong Kong grew because i t had o n l y

a 15% tax r a t e t h a t was lower than the r e s t of the world. There are those who would assume th a t i f government p r i n t e d the money i t needed t h a t t h a t would be i n f l a t i o n a r y . T h i s i s a matter of d e f i n i t i o n . They f o r g e t t h a t we i s s u e t r i l l i o n s of d o l l a r s through our borrowing i n the form of bonds. However, i f bonds, s t o c k s , r e a l e s t a t e and d e r i v a t i v e s are o u t s i d e of our d e f i n i t i o n of money, then t h i s 18th century t h i n k i n g makes sense. Sorry, i n the r e a l .world a bond i s s t i l l money.

Between 1986 and 2006, the n a t i o n a l debt rose frcan about 32.1 t r i l l i o n t o J8-.5 t r i l l i o n . This took p l a c e not i n p r i n t i n g money, but i n bonds. I n f a c t , we were fo r c e d t o i s s u e more debt j u s t t o pay the i n t e r e s t on debt. The i n t e r e s t payments f o r t h i s 20 year p e r i o d was $6,141 t r i l l i o n . Had we p r i n t e d the d e f i c i t between t a x a t i o n and spending (excluding i n t e r e s t ) > t h a t would have amounted- t o only $259 b i l l i o n a f a r c r y from the b a i l o u t s . I f we are already committing b i l l i o n s i f not beyond 1 t r i l l i o n f o r rescue, we cannot a f f o r d t o borrow oh top o f t h i s .

The very i d e a t h a t we borrow money r a t h e r than p r i n t i t i s somehow l e s s i n f l a t i o n a r y i s absurd and a throw-back t o the Gold Standard when nature c o n t r o l l e d the ' q u a n t i t y of money. Spain borrowed h e a v i l y on the g o l d i t expected from America. When i t s t r e a s u r e ships d i d n ' t show up and i t l o s t the Spanish Armada against England, the d e f a u l t destroyed the bankers i n Venice and r e l e g a t e d both Spain and I t a l y to- almost t h i r d w o r l d s t a t u s . The Spanish I n q u i s i t i o n merely caused the jews t o f l e e t o H o l l a n d t r a n s f e r r i n g banking to Northern Europe.- We. cannot a f f o r d the same mistakes. Sorrowing i s a an c i e n t t r a d i t i o n when there was ho other choice .

The Gold Standard & Cronic Shortage o f &mey

They say h i s t o r y i s b i a s e d - f o r i t i s w r i t t e n by the v i c t o r . But. we can a l s o remember t h i n g s of days lo n g s i n c e past w i t h rose-colored g l a s s e s . Some see g o l d as almost a r e l i g i o n - the s a v i o r t h a t w i l l d e l i v e r ;us from the e v i l o f i n f l a t i o n . That i s j u s t not t r u e . The boom-bust c y c l e e x i s t e d i n .ancient times as w e l l and always we f i n d no matter what system i s i n p l a c e , there i s . someone who .always spends too much.

The Gold Standard was a world t h a t was not so s i m p l i s t i c . I n an c i e n t times, i t p r o v i d e d the i n c e n t i v e f o r war - the best way t o increase money supply. I n f a c t , one o f the reasons there are so many anc i e n t coins t h a t have survived i s there was the p r a c t i c e of b u r y i n g the p a y r o l l before b a t t l e so th a t the other s i d e was denied the s p o i l s of war.

The Gold Standard a l s o meant t h a t the way t o create more money was through reducing the metal content - debasing the q u a l i t y o f the metal. Those who were l o o k i n g t o be dishonest had two options - {1) c o u n t e r f e i t i n g , or (2) c l i p p i n g . Take a c o i n out of your pocket and you w i l l see r e e d i n g on the edges of an American dime o r quarter f o r example. T h i s was an o l d a n t i - c l i p p i n g device- t h a t was t o prevent those who would shave a l i t t l e o f f of every c o i n - c o l l e c t i n g a p i l e of scrap metal. This gave r i s e t o banks i s s u i n g notes t o a t f i r s t guarantee the payment i n the proper amount of precious metals of gocd currency meaning u n d i p p e d coinage.

However, the g r e a t e s t problem w i t h the Gold, Standard was the i n a b i l i t y t o c r e a t e money other than war, a l t e r i n g contents, or changing the r a t i o o f s i l v e r t o g o l d as the s i l v e r Democrats t r i e d i n the l a t e 1300s. The money supply was i n the hands o f nature and thus was subject t o boom and bust c y c l e s based a l s o upon t h e d i s c o v e r y of metal. The C a l i f o r n i a Gold. Rush of 1849 c o n t r i b u t e d to the economic boom th a t l e d t o the Panic of 1957.

The disadvantage of the Gold Standard was the i n a b i l i t y t o create a steady new supply o f money t o keep pace w i t h the growth i n population and economic

needs. Going back t o the Gold Standard i s not the answer t o long-term economic growth nor would i t s o l v e the c u r r e n t economic c r i s i s . I n f a c t , i t would create an economic c o n t r a c t i o n t h a t would end f l e x i b i l i t y t o even deal w i t h the problem.

T h i s i s separate and d i s t i n c t i n s o f a r as g o l d p r o v i d i n g a p r i v a t e source of -wealth—that-remains ar s t o r e o f - v a l u e . The reason-gold 1 emeriged-as-iiioney-because i t was a valued commodity and recognizable i n a l l lands. They use g o l d f o r jewelry i n I n d i a and China the same way they use i t i n R u s s i a , Europe, o r the Americas. I t i s a s c a r c e commodity t h a t there would not be .enough o f i f every perscn i n the world wanted j u s t 1 ounce f o r themselves, whether o r not gold i s the " o f f i c i a l " monetary u n i t or the check against f i s c a l i r r e s p o n s i b i l i t y i s of no importance. I n the s p i r i t of l i b e r t y , a l l o w i n g g o l d t o r a n a i r i as the p r i v a t e s t o r e o f wealth i s f a r b e t t e r . That was the very i s s u e t h a t Roosevelt sought t o e l i m i n a t e - the a b i l i t y t o hoard g o l d as a hedge a g a i n s t government. T h i s i s a l s o why Roosevelt c o n f i s c a t e d g o l d so he could devalue the d o l l a r r e l a t i v e t o g o l d thereby any such p r o f i t would d e f a u l t t o the government - not the i n d i v i d u a l hoarding the g o l d .

A l l the problems w i t h the Gold Standard emerged- from the i n a b i l i t y to create money when needed. M i l t o n argued t h a t the d e f i c i t spending advocated by Keynes would l e a d t o only i n f l a t i o n r a t h e r than econcmic growth. Ineed, Keynes hi m s e l f d i d not advocate perpetual d e f i c i t spending year a f t e r year. Once the government r e c e i v e d h i s b l e s s i n g , they j u s t ran w i t h the b a l l , but the goal-post was p a s t decades ago. Looking a t the F e d e r a l budget s i n c e 1 936, the only years i n which t h e r e was not a d e f i c i t were f a r and few between:

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

During the 72 years between 1936 and 2008, there were only 11 years t h a t produced a budget surplus. This i s not a very good r e c o r d f o r Keynesian economics. Once the concept o f d e f i c i t spending was introduced by Keynes, i t was s e r i o u s l y abused. But the problem was not so much the d e f i c i t , but the f a c t t h a t a t the same time t h e r e was the pretense of m a i n t a i n i n g a Gold Standard a t a f i x e d q u a n t i t y of d o l l a r s t o an ounce of g o l d while the supply o f d o l l a r s was being increased and the g o l d supply was d e c l i n i n g . T h i s culirdnated i n the f i r s t break w i t h the t w o - t i e r Gold Standard whereas g o l d began t o trade on the London exchanges f r e e l y , t h a t was f o l l o w e d by the c l o s i n g o f the g o l d window i n 1971 when there- were more c o l l a r s than g o l d t o redeem them. The r e a l i t y of p e r p e t u a l d e f i c i t spending under the Gold Standard came home w i t h shocking f o r c e .

The Bottom L i n e .

A r b i t r a r y spending even on i n f r a s t r u c t u r e w i l l do nothing but create perceived i n f l a t i o n before i t even h i t s the economy. The work programs of the Great Depression made sense o n l y because there was a n a t u r a l d i s a s t e r i n the form of the Dust Bowl t h a t l a s t e d 7 years. I t i s t r u e t h a t unemployment rose t o 25%. However, i t was only 8.9% i n 1930 deep i n t o the s t a r t of the Depression. I t reached above 20% only when the Dust Bcwl destroyed jobs g i v e n we were s t i l l 40% a g r a r i a n i n our work f o r c e , unemployment began t o d e c l i n e w i t h 1935:20.3%, 1936 16.9%, 1937 14.3%, 1938 19% and 1939 17.2%, but as you can see, we have a s e l e c t e d memory f o r what r e a l l y worked and what d i d not. Unemployment i n 1940 stood a t 14.6% and a t the end o f •World War I I , i t was 1,9%. I t was not the WPA t h a t changed the economy, i t was the war. T h i s has l e d t o some c l a i m i n g a l s o ' s e l e c t i v e l y t h a t war i s good f o r the economy. We began the f i r s t peacetime d r a f t i n 1940 t h a t was approved on September 14, 1940 but i t was P e a r l Harbor on December 7th, 1941 t h a t o f f i c i a l l y s t a r t e d the war f o r Americans then declared war against Japan on December 8th f o l l o w e d by a d e c l a r a t i o n against Germany and I t a l y on December 11 t h , 1 941.

The WPA was i n s t i t u t e d May 6th, 1935. I t p r o v i d e d a v i t a l r o l e i n c r e a t i n g jobs not l o s t by the c r e d i t c r i s i s i n the f i n a n c i a l markets, hut by the Dust Bowl. The c o l l a p s e of the A u s t r i a n C r e d i t - A n s t a l t i n Hay 1.931, began a c r e d i t c r i s i s contagion t h a t swept the world c r e a t i n g a wave of business f a i l u r e s as we are seeing tcday w i t h General"Motors, unemployment was the worst i n Germany h i t t i n g 5.5 m-niinn in-1932.-lAiie.Britein^wasn_2._7 m i l l i o n . These were the co n d i t i o n s t h a t not merely l e d t o the e l e c t i o n of Roosevelt i n 1933, but Adolf H i t l e r a l s o i n 1933, From the September sanction o f Germany i n 1936 by B r i t a i n and France, i t was but o n l y about 3.141 years l a t e r t o P e a r l Harbor. The US had de c l a r e d I t s n e u t r a l i t y i n Europe on September 5th, 1939 when Germany invaded Poland. Tt wes the war and not our p a r t i c i p a t i o n t h a t ended the depression, but we became the arms and food d e a l e r s f o r Europe. By the end of the war, the US stood w i t h 76% of world g o l d reserves. That created. American wealth - not p o l i c y o r even; peacetime trade,

Tcday, i f we wage war, we spend our resources and the economy d e c l i n e s much as what took place i n Europe. Wax i s good f o r the economy, only when you are the _ a j f c d e a l e r , not the aggressor. Today, the work f o r c e i s n e a r l y 150 million. I f we s u b t r a c t the a g r i c u l t u r a l sector from the Great Depression, unemployment h i t a t about 10%. Since 1995, the US unemployment r a t e i s between 41-6%. But t h i s i s a l s o not a f a i r view of the economy. As of 2005, f e d e r a l government c i v i l employment i s about 2.7 m i l l i o n . The m i l i t a r y .personnel i s about 500,000 (Army), 54,000 (Navy), 353,000 ( A i r Force, and 20,000 (Marines) w i t h about 41,000 (Coast Guard). T h i s b r i n g s the f e d e r a l government consumption of labor t o about 3.7 m i l l i o n o r about 2.4% of the c i v i l work f o r c e . Outside the Great Depression, the worst bout o f uneH^loyment came i n 1975 when i t h i t 8.5% and d i d not drop below 7% u n t i l 1987, The peak during the economic d e c l i n e between 1950 and 1935 took place i n 1985 a t a b o u t 7 . 2 % . We d i d see 7.5% f o r 1992 t h a t l e d t o a b r i e f popular movement f o r Ross Perot and the v i c t o r y o f B i l l C l i n t o n i n the P r e s i d e n t i a l e l e c t i o n s . To reach 25% tcday, we would see sweeping p o l i t i c a l changes and massive p o l i t i c a l u n rest. I t would be impossible without the c o l l a p s e o f s t a t e and l o c a l governments s i n c e we see t h a t a g r i c u l t u r e accounts only f o r about 3% c u r r e n t l y .

The DS Gross Domestic Product ("OJP"i i s now about S15 t r i l l i o n a n nually. I f we assume the h i g h «Hrfa o f a budget f o r one year w i l l be $3 t r i l l i o n , the t o t a l f e d e r a l t a x c o l l e c t e d stands a t about 17% of the GDP, Tf we spent t h a t same amount o f money on i n f r a s t r u c t u r e , by the time t h a t f i l t e r s i n t o the economy, the e f f e c t would be t o c — l i t t l e - t o o - l a t e . We would need another l a y e r of ov e r s i g h t and c o s t s t o even a d m i n i s t e r such a p r o j e c t . I f we simply e l i m i n a t e the f e d e r a l tax c o l l e c t i o n , t h a t would be an immediate shot i n the arm. But t h i s too would f a l l short unless the people see t h i s as a permanent r e d u c t i o n . Companies would not r e l o c a t e f o r a mere one-off r e d u c t i o n . What we need i s a three-punch s o l u t i o n .

We already know t h a t i n t e r e s t r a t e s and wholesale i n c r e a s e s i n the money supply w i l l not be l i m i t e d i n scope to the domestic economy, whatever we do t o r e l i e v e the economic pressure (lower i n t e r e s t r a t e s - o r - in c r e a s e spending), i s more l i k e l y t o Cause f o r e i g n c a p i t a l t o f l e e . This w i l l f u r t h e r c o n t r a c t the domestic money supply and would most l i k e l y prolong the economic depression.

We must consider what seems t o be the most r a d i c a l s o l u t i o n , but i n 21st Century economics i n s t e a d o f 16th Century, i t i s f a r more targeted and p r a c t i c a l . I f we e l i m i n a t e the f e d e r a l income tax and stop the borrowing, we can jump s t a r t the economy and provide t h a t boost t o confidence t h a t the permanent tax c u t d i d i n 1964 compared t o the unsuccessful one-off t a x c u t s t h a t went more t o increase savings than srending.

Ws cannot l o s e s i g h t of the f a c t t h a t the f e d e r a l government i s now a l s o ccmpeting f o r t a x d o l l a r s against the s t a t e s and c i t i e s who are now i n t r o u b l e

and cannot create money as the f e d e r a l government can do. Unless we now consider a 21st Century d e f i n i t i o n & s o l u t i o n , then the 18'th Century t h e o r i e s w i l l cover the s p e c u l a t i v e l o s s e s f o r investment banks, not Wall S t r e e t , and c r e a t e only work programs f o r stock brokers and programmers t o l e a r n how t o f i x b r i d g e s and roads. That seems one way t o lower s k i l l s o p p osite o f the p o l i c y o f the- WPA i n 1935.

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

{1) W i l l s i g n a l a permanent and immediate change t o the p u b l i c r e s t o r i n g "confidence" i n the future and w i l l r e s u l t i n immediate economic r e l i e f .

(2) W i l l s h i f t the t a x t o make domestic labor cheaper whereby corporations who move o f f s h o r e would then be su b j e c t t o t a r i f f s and e x c i s e taxes but not on domestic l a b o r depending upon what n a t i o n they moved t o .

(3) E l i m i n a t e the competition with the .states ft l o c a l government that w i l l o n l y be p e t i t i o n i n g f o r bailouts of t h e i r own, f o r as r e a l estate- p r i c e s decline,'••the t a x base w i l l implode c r e a t i n g a c c n t r a c t i o n i n revenues f o r c i n g the s t a t e s and l o c a l government t o ; l a y o f f workers.

14) E l i m i n a t e t h * high c o s t s o f c o l l e c t i n g taxes we do not need due t o the e v o l u t i o n of what we de f i n e as money.

[5) E l i m i n a t e the c o s t and delay i n creating a new adrriinistration. to oversee some s o r t of program t h a t would take years t o a c t u a l l y produce any economic e f f e c t , whereas simply r e t u r n i n g what was re c e i v e d i n income taxes [not s o c i a l s e c u r i t y ) i s a c l e a n way t o jump-start the economy - immediately!

a.) To those who w i l l argue Marx's philosophy t h a t the r i c h w i l l get more, w e l l they a l s o p a i d more, and i t i s the concentration of c a p i t a l t h a t c r e a t e s the pool o f funds t h a t banks then lend t h a t w i l l e l i m i n a t e the c r e d i t crunch. I f someone has $1 b i l l i o n i n cash and he i s now e n t i c e d t o deposit i t w i t h a bank because we a l i o w i l l e l i m i n a t e the $100,000 FDIC l i m i t a t i o n t h a t prevents b i g money from being l e n t out and merely i n s u r e a l l d e p o s i t s because we i n s t a l l b e t t e r r e g u l a t i o n t o prevent gaps w i t h unprecedented leverage, then we should have no problem securing a l l d e p o s i t s , t h a t w i l l suddenly a t t r a c t - a c i t a l from around the wo r l d as w e l l . T h i s w i l l b e n e f i t the average wage e a r r e r and s t o p the Marxism that caused both R u s s i a and China t o see the l i g h t t h a t we remain b l i n d , p r e f e r r i n g t o l i v e i n the dark.

(1) FDR c o n f i s c a t e d gold so he c o u l d devalue the d o l l a r . T h i s was l i m i t e d t o the times because we were s t i l l on a Gold Standard. By monetizing the debt, we would hot create a dramatic change i n i n f l a t i o n because i n the r e a l world, when we i s s u e bonds, we may not d e f i n e t h a t as "money" i n terms of M1, but i n the p r a c t i c a l p e r s p e c t i v e , we look a t how much we owe and judge t h a t as money is s u e d r e g a r d l e s s o f what we c a l l i t .

(2) Between 1986 and 2006, the i n t e r e s t exrenditures t o keep the debt i n place accounted f o r almost 72% of the increase i n the debt. We are funding our mortgage w i t h a v i s a c a r d .

I I . J E l i m i n a t e the N a t i o n a l Debt By Monetizatign

(3) Those who b e l i e v e t h a t t h i s would be i n f l a t i o n a r y are j u s t misguided f o r the marketplace already sees the same amount of d o l l a r s h e l d as assets i n the form o f bonds and r e p l a c i n g t h a t same amount w i t h d o l l a r s w i l l save as we have seen 72% o f the o v e r a l l growth i n debt t h a t we could never repay i n _any event, and no government a c t u a l l y b e l i e v e s they w i l l i n f a c t pay o f f t h e i r ' d e b t f o r t h a t would be a c o n t r a c t i o n of money supply unprecedented t o date.

;A) E l i m i n a t i n g the Insurance L i m i t a t i o n a t the FDIC

(1) There i s no reason why we should not. i n s u r e a l l d e p o s i t s i n commercial banks, f o r t h i s would replace government debt and make vast sources o f cash a v a i l a b l e f o r l e n d i n g and would e l i m i n a t e the c r e d i t crunch overnight.

(2) I f we i n s u r e a l l commercial bank d e p o s i t s , t h i s w i l l a l s o a t t r a c t f o r e i g n c a p i t a l i n c r e a s i n g the c a p i t a l reserves f o r l e n d i n g .

(3) Investment Banks should be excluded f o r they are higher r i s k and not p a r t of the " r e a l " ccmnerical network w i t h l o c a l branches t h a t s e r v i c e the community. Those who wish t o d e a l w i t h such banks should a l s o s u f f e r the higher r i s k f o r higher y i e l d a. ) There must be a s i n g l e r e g u l a t o r y body w i t h no gaps i n the

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

b. ) There must be transparency and o n l y openly regulated exchanges where c o u n t e r - p a r t i e s must have the asset t o support the p o s i t i o n , not mere r e p u t a t i o n .

(B) S o c i a l S e c u r i t y Reform

{1) By e l i m i n a t i n g the borrowing and t a x a t i o n a t the f e d e r a l l e v e l c o n s i d e r i n g the income t a x ( d i r e c t t a x a t i o n ) , t h i s w i l l a l s o a u t o m a t i c a l l y r e h a b i l i t a t e the s o c i a l S e c u r i t y program and make t h i s i n t o a r e a l savings p l a n t h a t :would then Invest the funds becoming a n a t i o n a l wealth fund t o a l s o enable i t t o face the entitlements coming sooner than l a t e r where the p u b l i c a l s o have l o s t f a i t h i n ever seeing a r e a l d o l l a r .

(2) Once f r e e d from t h e investment i n government bonds, t h i s fund can c r e a t e tremendous economic progress f o r the f u t u r e by even a l l o c a t i n g 3% f o r venture c a p i t a l i n s i z a b l e new innovations t h a t w i l l g r e a t l y advance medicine, science, and technology.

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

(1) We need t o e s t a b l i s h a n a t i o n a l h e a l t h - c a r e program f o r a l l t h a t w i l l r e l i e v e the coning c r i s i s i n pension funds o f c i t i e s , , s t a t e s , f e d e r a l government, and corporate America. The c o s t s are so steep, even s e r v i c e j o b s are l e a v i n g f o r a s a l a r i e d employee c o s t i n g $50,000, ends up c o s t i n g on average $125,000 between taxes and health-care along w i t h pension c o s t s .

(2) we must face the f a c t s , t h a t the purpose o f s o c i e t y i s the cooperative e f f o r t s of s o c i e t y t o seek lower costs and s e c u r i t y , not much d i f f e r e n t why people were w i l l i n g t o be a s e r f so that when danger camer they got to run behind the w a l l of the c a s t l e . •

(3) A n a t i o n a l heath-care program i s v i t a l t o our s u r v i v a l f o r the costs are r i s i n g so r a p i d l y , corporates are passing those c o s t s on t o employees and the q u a l i t y o f l i f e i s c o l l a p s i n g .

(4) Ate must stop the nonsense, pass t o r t - r e f o r m , stop the craay l a w s u i t s , and the costs w i l l ccme back i n l i n e t o where they once were 20 years ago when small companies handed out h e a l t h care that covered the whole f a m i l y o f every worker. The lawyers w i l l f i n d another area t o e x p l o i t , o r perhaps they too have to t i g h t e n t h e i r b e l t f o r the good of the nation before we don't have one anymore.

(5) E l i m i n a t e trade b a r r i e r s t o cheaper drugs from Canada and force them back i n lin» as w e l l . T h i s i s our f u t u r e we are t a l k i n g about, we have seen what the investment bankers d i d t o the economy with t h e i r outrageous leverage and unregulated shadow markets, L l e t us not wait u n t i l h o s p i t a l s c l o s e because people can no longer a f f o r d health-care.

(6) We need urgent a t t e n t i o n f o r as unemployment r i s e s , c h i l d r e n w i l l new d i e f o r the "greed" o f t h i s ; i n d u s t r y i s d e s t r o y i n g the very t h i n g they c l a i m to be p r o t e c t i n g .

6 U H W A T T O N

Thi s three-punch s o l u t i o n i s c r i t i c a l to our s u r v i v a l . We must r e s p e c t t h a t t h e r e a r e j u s t some tiroes i n h i s t o r y that we have a c h o i c e t o make a r e a l e f f o r t t o change the t r e n d , o r t o b u l l s h i t our way around the f a c t s o n l y to. postpone the r e a l i t y , wo one expects the n a t i o n a l debt t o ever be p a i d . We can continue t o l i v e i n our 18th Century world and pretend t h a t i f we p r i n t the money i t w i l l be some how more i n f l a t i o n a r y than p r i n t i n g bonds and spending 72% more t o keep them going when t h e r e i s no p l a n t o ever r e t i r e than anyway.

I t i s time t o c r e a t e a c o n t r o l bum before we explode from our own nonsense. I t i s not t o l a t e t o save the day. Put we have t o s t a r t t o make r e a l i s t i c p l a n s and address the honest i s s u e s . The investment Bankers have blown-up t h e i r world as they always do. They have never got it r i g h t even once! They create models t h a t i g n o r e the b i g events because they thought they don't happen that o f t e n . Well i t happened and now they are begging t o cover t h e i r l o s s e s . Healthcare and the wave of e n t i t l e m e n t s i s going t o h i t shore lik» a tsunami. Are we going t o j u s t once plan f o r the f u t u r e , o r i s democracy • the worst k i n d of government because there i s too much t a l k and no a c t i o n ?

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

t h a t p r i n t i n g ! d o l l a r s o r bonds i s r e a l l y the same t h i n g except bonds are the g i f t t h a t we keep having t o pay f o r generation a f t e r generation. End the s t u p i d borrowing, We are not i n dz anymore. Gold i s not money. Let u s ' s t a r t understanding the modern world we l t v e l i o today.

Martin A. Armstrong ArmstrongEconomics^G^ll. ccm

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