trade deficit – Freeread

Creating Wealth

July 17, 2011July 20, 2017 Joseph Dewey

This entry is part 31 of 31 in the series 2011B

They say rocket science is complicated but I don’t think it holds a candle to understanding the economy, currency, the markets and what makes them work. If you study rocket science you basically learn A, B and C and find it equals D. There is very little if any disagreement among rocket scientists as to what makes a rocket work.

By contrast economic students can study A, B and C and cannot come to any unified conclusion. Some think the answer is D; others E or F and still others think no definite answer can be found. Average people listen to economic debate and their head starts to spin. Most just go with some authority that is in harmony with their mindset and accept what they say.

In this treatise I have only covered a small amount of economic thought, but it is an important part that is obscure to the people and widely misunderstood. I believe that the majority who read this can see the truth in what I present.

At present the majority do not know enough about the principles of money to know what is the best money system to support. Most people do not think about it that much. They believe our money system is in danger but not sure of the cause. They vaguely think that overspending and bad management has a lot to do with it but not sure of the details so they defer to their political leaders.

There are a number of economic points that the majority understand and these must be the starting point for positive change which is to come.

(1) It is precarious for the State, business or individual to borrow more money than he has income to pay back.

(2) Much of our money we borrow and spend is wasted.

(3) It’s not a good idea to place our finances in the hands of a third party as we do with the Federal Reserve for instance. Unfortunately many think the Fed is a government entity.

(4) If we really could create our own money interest free then yes, the majority would support this over borrowing from private sources at interest. The public merely needs convincing that this could be done.

(5) Most understand that too much money in circulation causes inflation.

(6) The majority feel there are a number of things wrong with our economy and money system but not sure of all the causes or the best solution.

That said let us sum up a plan for a money system that is likely to have majority support once the information in this treatise is understood.

As stated earlier there are two types of fiat money. The first is that which we have today. It is created not by the government but by a private banking system and then loaned to our government, business and individuals. All new money under the current system is linked to debt and interest.

The other fiat money is what is proposed here instead. We shall call this the New Greenback. This is money which creates no debt and adds no interest due by the government.

To create this money our government must do today what it did in the days of Lincoln and merely assume its constitutional authority to create its own debt free money. The new money could be more potent than the old Greenback, which had limited use. This new money could be used for all debts and payments foreign and domestic.

Under the current system the people are reluctant to support borrowing money to stimulate the economy or build new infrastructure. The downside is we have to go into debt and pay interest to do this.

This downside does not exist with the New Greenback. Let us say that we want to build a new bridge using the New Greenbacks. All the government has to do is issue the money to accomplish the job. The money, even though created by government, is far from worthless because after it is spent the bridge remains and will continue to add value to the economy for 50-100 years. Before the issuance of the New Greenbacks we had nothing. Afterwards we have a valuable bridge and new money added to circulation. The new money added to the system is not inflationary because its value is sustained by the value added by the bridge.

This is a much different situation than much of the money added to circulation in the past as much new money has been spent on things that add no value to society. During wartime we built many armaments that are destroyed in battle. These dollars were inflationary because they added no lasting value to our country.

In the past, much of the money that has been added to the system has been borrowed at interest to create armaments that add little wealth to the economy. They may be necessary for our security but their end is to be destroyed. Thus the dollars to create them are added to circulation but no added value to sustain the value of those dollars. A battleship built and then destroyed is as if it was never built (value wise) but the effect of the money added to circulation to build it remains.

If we create dollars to produce roads, bridges, and new infrastructure then we are adding value to our economy. When value is added in the form of usable products and services then dollars can also be added to the economy without producing inflation. If we issue New Greenbacks to sustain the creation of wealth building products and services then we can solve the unemployment problem. All we have to do is create wealth-building jobs with the New Greenback that can put people back to work. There are usually plenty of these to offer jobs to all who wish to work if we just had the money. The good news is that under the New Greenback system the money available for goods and services that add value would be unlimited.

One important use of the New Greenback would be in managing the national debt.

The first benefit is we would not be adding to the debt through borrowing from the Federal Reserve. Instead of borrowing at interest the government would merely create New Greenbacks debt and interest free with the stroke of a few computer keys. The only debt that would be added would be money borrowed from other nations such as China, Japan and the UK. At present foreign nations hold about 32% of our debt.

We would probably still borrow money from the nations with whom we have a trade deficit because these trading nations want to loan us money so we can use it to purchase more products from them. The New Greenback system would help with interest and repayment. Presently, we pay only interest on loans and we have to borrow to do this. Under the New Greenback system this would no longer be the case. Instead of borrowing, we could issue New Greenbacks to pay the interest (and principle when needed). This would have the benefit of creating no new debt.

Under the New Greenback system the trade deficit would shrink because of the stimulation it would provide for American production and the economy as a whole.

Unfortunately, much of the money borrowed by the government today not only places us in debt and accrues interest, but is spent on things that add no wealth. In addition to war materials a tremendous amount is spent on the various bureaucracies. Some government agencies, such as NASA, add some wealth to our system but many government workers just move wealth around without creating anything of sustained value. This is one important reason that a small government is good for the economy. The fewer the bureaucrats that need to be paid the better the sustained value of the dollar will be.

The Obama administration was mystified that their economic programs did so little for the economy. One thing that did not help, according to the U.S. Office of Personnel Management, between Sept 2008 to Sept 2010 (latest figure available) the number of federal jobs increased in number by over 174,000. These were not replacement jobs, but new ones.

Overall, according to a report by Obama’s own economists, the jobs added by his stimulus program cost $278,000 per job. If Milton Freidman were still alive he would be telling us we could have done better by just using helicopters and dumping the money at random for the people to spend.

It is now obvious that most of the stimulus did not go to wealth creating “shovel ready jobs,” and even Obama admitted this. Maybe the money didn’t go to shovel ready endeavors that create wealth but we do know it went somewhere. Obviously it went to low wealth producing high paying low value jobs that add little to the wealth of the nation. This is evidenced by the fact that the stimulus did not even create the expected short-term improvement except for a few fat cats benefiting. Instead, the unemployment just went up, the debt owed by our grandkids went up and the interest we have to pay in the present went up.

The Obama stimulus was $775 Billion. If we add in the interest yet to be paid it will add up to over a $1 trillion.

Let us say we could reverse time and instead of stimulating the economy with borrowed money at interest that was mostly spent on things that did not produce wealth we take a different approach, which is this.

The Republic takes back its power to create money and issues $1 trillion in New Greenbacks. This is plenty of money to tackle quite a few things. But let us say we just put $500 billion, or half of it, toward repairing and improving our infrastructure as well as building new schools. That would have reduced the unemployment rate right there and we could have had a half trillion dollars left over for something grand.

Forget about spending millions to help Chinese prostitutes to drink responsibly on the job or to restore old Indian trails. Here are a number of wealth producing projects we could have tackled.

(1) Going back to the moon with a dual purpose.

First, to add new life into the space program, which also has proven to add many wealth producing innovations as well as helping national security.

Secondly we would mine Helium 3 which is a non polluting environmentally safe nuclear fuel. This potent source of energy could supply all our energy needs for thousands of years and eliminate our dependence of foreign fuel. This project would pay of big time for centuries.

(2) As an alternative we could perfect breeder nuclear reactors that use nuclear waste as fuel and create non-poluting, carbon free nuclear energy while eliminating nuclear waste.

(3) Make zero interest loans to small businesses if they commit to hire one person for each $50,000 they receive. This would create jobs at less than 18% the cost of Obama’s program and we would get most of the money back to spend another time.

(4) If we just used the remainder and sent each man woman and child in the country a check for $1,600 each the economy would be more stimulated by this than anything done by the official stimulus.

And the best part would be that nothing would be added to the national debt, there would be no interest to pay and little or no inflation would result.

When one considers the possibilities it is amazing how simple the solution is to economic instability. Only four things need to be accomplished.

(1) Our government needs to take back its power to create interest and debt free money and issue New Greenbacks.

(2) The New Greenbacks must be issued, as much as possible, to support endeavors that create wealth.

(3) A reasonable balance must be attained so there is not a lack of money or too much money in circulation.

(4) Make legal the creation and distribution of alternative currencies such as gold & silver coin, local currencies, virtual currencies etc., though taxes and public services must be paid with the New Greenbacks. This leaves the door open for the best ideas in currency to demonstrate their value.

Even though items two and three are simple in theory they are difficult in execution because selfish interests want to overspend. Not only do powerful players seek to overspend but they care not where the money is spent as long as their pressure groups are happy. Thus we have the danger of the money being spent on projects that are frivolous and do not create wealth.

Fortunately, there is a solution to this problem and that rests with the final arbiter of power in this country as well as the world – the people.

The people are willing to do this if they have some organization or vehicle to provide a platform for their power. Two such organizations are outlined in this book. The first is Molecular Politics, a concept that allows the voters to be co-legislators with their representatives. Since this may take some time to create and perfect, a preparatory group called The Majority Speaks is proposed.

These organizations previously detailed in this book which is dedicated to the end that the people are well served and their goodwill becomes manifest as abundance for all.

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Additional Points

March 25, 2011July 19, 2017 Joseph Dewey

I’ll cover the next three points briefly as there’s not much new to be said about them.

(4) If we do not have a balanced budget amendment then something needs put in place where borrowing and spending is kept within reasonable boundaries.

It is difficult to create black and white rules that work with consistency. There always seems to be times when rules need to be broken – as Solomon says, “There is a time and season for all things.”

The problem with our economy, and especially the spending part, is that it must be handled with good judgment and our elected representatives have a dismal record beyond what could have been imagined in this category.

We need to do two things to correct the problem. First, we must change their job description as written about previously. Secondly, an independent body such as The Committee of Twelve mentioned earlier should approve any budget-busting spending.

And finally citizens themselves must serve as watchdogs and let their representatives know the full force of their will and that will is not to spend toward bankruptcy.

(5) Grow the economy through low taxes and business incentives. A healthy economy strengthens the dollar.

This is a no-brainer and there has been plenty written on this subject. Unfortunately, the tax and spend crowd just does not seem to understand that infinite taxation is not possible.

More taxation does not mean more corresponding income to the government, as the Left seems to mistakenly think. There is a percentage point, which if crossed, brings less income and not more. I have heard of no definitive study that proves what that percentage is but many guess that the rate is around 20%. In other words, a tax rate averaging at over 20% may bring a diminishing return and is not productive.

In addition to keeping the tax rate low the tax collection system needs an entire overhaul. Consider this: The cost each year to businesses for all the accounting and record keeping to comply with the tax system is estimated to be $338 billion for just one year. That is an enormous sum equal to over $1000 for every man, woman and child. Add to this the $12 billion (and growing) to sustain the IRS and the lost production due to the diverted capital and energy we’re talking about some big money here. That’s plenty to cover any Social Security, Medicare, health care, or educational shortfall we can imagine.

Supporters of the Flat Tax claim that this would reduce the compliance expenses by 94%. If this is true than that alone makes a great case for implementing it. In addition to saving all that money business owners would have much greater peace of mind since they do not have to place so much attention on pacifying the IRS.

An even more labor saving idea is a national sales tax. Not only does this eliminate the need of the many billions spent on compliance but it increases the tax base. Currently there are many who do not pay taxes, or fudge the books and just pay part of them. This not only includes many business and individuals but drug dealers, The Mob, and many others outside the law. With a national sales tax even the drug dealer who declares no income to the IRS would have to pay the sales tax when making a legal purchase.

It is indeed important to overhaul our tax system but we must not let this goal overshadow the necessity of making spending cuts, which are of equal importance. We must achieve a working balance in both of these areas.

(6) Reduce the trade deficit. We have had a trade deficit since 1975. Should we be worried?

The problem with deficits is they lead to us becoming a debtor to the nation that holds our dollars. If we spend $100 million more in China, Japan or the UK than they do here then that nation’s banks will be just sitting on all that cash drawing no interest. This they do not like to do so they will take that money and loan it back to us if we are willing to take it – and we always are. These loans are usually made in the form of buying U.S. Treasury bonds. They figure it’s better to have these bonds drawing interest than just sitting on the cash making nothing.

If you buy some tires on credit the problem is that sooner or later the tire company will want payment of some kind. Even so, our debt to China is over a trillion dollars and this gives them a tremendous economic power and advantage over us. We are in a similar disadvantage to a lesser degree with numerous other nations.

During the past decade our deficit has ranged from around $400 to over $800 billion. The interesting thing about this is that the average deficit is not that much more than the cost of our oil imports. If we were to become energy independent then our deficit would be minimal and very manageable.

Doing more manufacturing and developing resources at home could do a lot to solve the problem, but energy is the big item that could reduce the deficit and that is the core of the next point.

(7) Secure energy independence. This is another no-brainer but the problem occurs in execution. The Left and the Right have conflicting ideas of how to achieve this.

Helping the trade deficit is just one of the benefits of securing energy independence. There are numerous others. Among them are:

• Producing most of our energy at home will create many American jobs and reduce the unemployment rate creating more prosperity and a sounder economy.

• It will reduce power from many who wish us harm such as Iran or Chaves from oil rich Venezuela.

• It will remove the securing of oil in foreign lands as an incentive for us to go to war.

• The United States will be seen as less intrusive which would improve our reputation around the world.

With all these potential benefits it is almost criminal that our fearless leaders have not had the common sense to devise a workable plan for energy independence. One thing we know for sure and that is the mere speaking of words is not enough. Here are a few we have heard in the past.

“At the end of this decade, in the year 1980, the United States will not be dependent on any other country for the energy we need.”
Nixon 1974 when oil imports were at 36.1%

“We must reduce oil imports by one million barrels per day by the end of this year and by two million barrels per day by the end of 1977.”
Gerald Ford 1975. Oil imports still at 36.1%

“I am tonight setting a clear goal for the energy policy of the United States. Beginning this moment, this nation will never use more foreign oil than we did in 1977 — never.”
Jimmy Carter, July 15, 1979. Oil imports – 40.5%

“While conservation is worthy in itself, the best answer is to try to make us independent of outside sources to the greatest extent possible for our energy.”
Reagan 1981, Oil imports – 43.6%

“When our administration developed our national energy strategy, three principles guided our policy: reducing our dependence on foreign oil…”
George H. W. Bush 1992, Oil imports – 47.2%

“The nation’s growing reliance on imports of oil…threatens the nation’s security…[we] will continue efforts to…enhance domestic energy production.”
Bill Clinton 1995, Oil Imports – 49.8%

Unfortunately, by the time George W. Bush assumed office the rate had hiked to 61% and continued to get worse forcing Bush to act. In 2006 when imports reached 65.5%. He said:
“Breakthroughs…will help us reach another great goal: to replace more than 75 percent of our oil imports from the Middle East by 2025.”

Finally in 2009 when imports had reached 66.2% Obama added:

“It will be the policy of my administration to reverse our dependence on foreign oil while building a new energy economy that will create millions of jobs.”

A couple years has passed at the time of this writing and nothing much has changed.

All of our presidents have meant well, but the lesson we get from them is not how to achieve energy independence, but that words alone without a workable and executable plan is meaningless.

What should we do then beyond just speaking the words – “We must get off foreign oil!!!” “We must become energy independent!!!”

First we must realize that adding exclamation points to out desires does nothing. We must have a plan.

A book could be written on a reasonable plan but I just have space here to cover some essence.

The pure essence of our energy policy should be this:

Do everything possible to maximize domestic energy production of current energy products and methods. In addition to this we must encourage practical forms of alternative energy and do what we can to bring forth new energy sources.

It is possible that new energy sources like fusion, or wave energy will be perfected in the next couple years and our troubles will be over but we can’t risk letting down our guard on conventional sources until their replacement is secure.

Right now their replacement is not secure so we must drill for oil, mine coal and build nuclear plants. The advantages of securing energy from conventional sources far outweighs the disadvantages of discarding them too early.

Without sufficient energy we would wind up polluting our country much more than we would by burning fossil fuels. If you do not believe me then check out the quality of the environment in third world countries where there is a dearth of conventional energy sources.

Environmentalists do not want us to drill for oil in America because of potential damage to the planet but if we do not get domestic oil then we will get it from some foreign country and that country is still part of the planet. If we look at the earth as a whole what is the difference between drilling in the United States or Mexico, Venezuela or Canada?

None.

If we can continue to supply the energy we need and advance in technology then we should have viable alternatives to coal (the worst polluter) and oil within 50 years, maybe less.

If we sabotage ourselves and shoot ourselves in the foot by cutting off our energy sources then technology will suffer and it could be hundreds of years before environmentally friendly alternatives are perfected.

In other words, we have to advance to clean energy on the back of not so clean energy. Sometimes you have to wade through some mud and grime to get to the cleansing current of the river.

Abundant domestic energy is crucial to our economic prosperity and economic prosperity is crucial to achieve a lasting clean environment.

May we follow the sensible path.

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