Ingo Bischoff, Part Two

I was asked a series of questions by one of the feed-backers at the Daily Bell, the same Ingo Bischoff interview as referenced in my previous post.

Following are my responses:

@Not Anti-military Per Se

Thank you for your kind comments.

“If Real Bills are like credit who gets the interest?”

Who says credit must come with interest? Credit can be created with or without interest, depending on the desires of the one granting the credit, I imagine.

“Real Bills seem to arrise from production and consumption which seems to be analagous to non fractional credit from savings…”

Fekete is quite clear, to quote him: “I made the central point that the source of commercial credit is not saving but consumption.”

Two people cannot eat the same meal. Something cannot be consumed and used in production at the same time. It is fractional reserves on its face.

“With consumption the Real Bill was in existence only along side the unsold product. This is not credit from nothing.”

From where did the means arise to produce something? Funny money and funny credit can be created from nothing; the worker producing goods financed by Real Bills must eat something while he works for 90 days.

“Inflation transfers wealth, true? Who is the beneficiary of this transfer with Real Bills? Production apparently.”

Yes.

“Real Bills seems to decentralize wealth and power….In any event, Real Bills seem to limit the role of bankers generally and central bankers specifically.”

If arising from a free market, certainly. Ingo continues to indicate a role for the state, and this causes me to hesitate. I do not state anywhere that Real Bills offer no benefit to the current.

“But could Real Bills cause a misallocation of capital?”

Yes, as production is demanding resources that would not have gone into that which it was used absent Real Bills.

“Inflation causes rising price level, true? Real Bills may when the come into existence but then they disappear after ninety days.”

Inflation of the money supply may or may not result in a general increase in prices. Many other factors are also involved, technology improvements for example. That real bills are inflationary only for the time they exist makes them no less inflationary. They no less distort the market and send false signals for this period of time.

“Thru DB interviews it appears that by way of Geo Mason U Econ "Austrians" support fractional banking and even consider it sacrosanct apparently. At the same time these "Austrians" are clear in their denunciation of Real Bills.”

Generalizing the GMU crowd is probably not safe, but my overall read is that there are some there who support FRB only to the extent that it is fully left to the market, not supported by the state. I cannot disagree with this, although some affiliated with the Mises Institute take strong exception. I note that Ludwig von Mises himself seems to indicate acceptance of the possibility of fractional reserve banking within the context of a fully free market in competitive banking and that the market will discipline this to the extent necessary.

”Perhaps most notably Real Bills apparently do not lead to intertest charges as a drag on production or consumption.”

I do not see interest as a drag on production or consumption. All activity must be financed somehow, be it by debt capital or equity capital. Either type of capital will demand a return, which the user of capital owes to the provider of capital. Why isnt it said that equity capital is a drag on production? Does not the provider of equity also demand a return?

One of the issues that doesn’t hold water for me is the difference to the businessman of interest vs. discount. Both reduce from the source of fund (being revenue). Both reduce the bottom line (being profit). In both cases, a third party is taking a cut for carrying paper. All the pretty words in the world do not change these facts. I am quite certain this makes me too stupid for the Real Bills crowd, but to the businessman the distinction is meaningless.

More on Real Bills, with Ingo Bischoff

The interview with Mr. Bischoff can be found here:

http://www.thedailybell.com/1829/Anthony-Wile-with-Ingo-Bischoff-on-Real-Bills-and-Why-They-Are-Not-Inflationary.html

I posted the comments below at the Daily Bell site as well.

Real Bills are inflation. They expand the money supply beyond the savings available. Setting aside the other (possible) merits of Real Bills, it cannot be ignored that they are inflation. I have demonstrated this before, using the words of both Fekete, and Bischoff, I will do so again.

IB: These surplus goods where exchanged via a "barter system". When the barter system proved too localized and lacking in a fixed standard of value, the "money system" evolved….Gold is "Money", because it is the one commodity with constant or near constant marginal utility.

BM: from these statements, gold represents the value of the “surplus goods.” Therefore, gold represents the “savings” produced and available within an economy.

IB: Gold as a medium of exchange lost its usefulness when the demand for goods outstripped the ability of physical gold to finance the production of goods.

BM: Is the concern the loss of the ability of gold to finance the production of goods? Are we talking about a solution for a lack of credit? There is only a lack of true credit if there is a lack of savings. By definition this is so. Any creation of credit beyond savings illegitimately transfers wealth from one party to another through inflation.

IB: Gold as a medium of exchange to separately finance each step in the production of consumption goods in a modern economy is completely unworkable.

BM: Gold as a medium of exchange ESPECIALLY in a modern economy is completely workable. We don’t need images of tradesmen carting bags of gold to the town market. With modern computers and telecommunications, gold can be used as a medium of exchange instantaneously, countless times per day. The infrastructure is already in place.

IB: The solution was found by using Real Bills as "clearing instruments" to finance the production of consumption items.

BM: Clearing instruments or financing instruments? They are not necessary to clear, and if a financing instrument, they are utilized because, as IB says above “Gold as a medium of exchange lost its usefulness when the demand for goods outstripped the ability of physical gold to finance the production of goods.”

To be clear, IB states clearly that the surplus produced by society is represented in the gold. But when there is not enough gold (surplus, or savings) to finance production, Real Bills are utilized. It is fractional reserve banking. Credit despite lack of savings. This is inflation.

IB: Real Bills function as "clearing instruments." They are not "credit instruments", as is widely asserted.

BM: This is widely asserted only because proponents of Real Bills go back and forth, as IB does often in this interview, for example: “The solution was found by using Real Bills as "clearing instruments" to finance the production of consumption items.” Can IB blame the critics for this misunderstanding?

IB: “Soon, the use of gold as a medium of exchange proved insufficient to finance the production of goods and also facilitate their exchange.”

BM: Once again, are they clearing or are they credit?

IB: Only producers of consumption items which are sold within ninety days are acceptable to a drawer of Real Bills.

BM: Says who? Some law passed by parliament a few hundred years ago? As DB points out in the afterthoughts, IB shows a faith in the state to protect trade that has little basis in history.

IB: Strong supervision by the State over commercial bank operations is essential to prevent rogue bankers from creating havoc.

BM: See my comment immediately above.

IB: Contrary to the widely held perception that the Federal Reserve Act was the result of lobbying and manipulations by the big money center banks, the Federal Reserve Act was really an attempt by the states to rein in the violation of good banking practices by the big money center banks and to preserve the application of the "Real Bills Doctrine" for commercial banking.

BM: What?

IB: The original FRA of 1913 authorized a "redeemable" Federal Reserve Note to be created only against Real Bills and gold within the system. "Anticipation Bills" or U.S. Treasury debt instruments were specifically banned from monetization under the original 1913 FRA.

BM: I have no idea if this was what was in the original legislation. I will grant that it is true. With that, is it not possible that the camel just wanted to get his nose under the tent? The big banks worked out a law that had some teeth, only knowing that, once under the tent, they could manipulate it to their liking?

IB: When in the early 1920s the national economy experienced a recession, the NY FED under Benjamin Strong promptly violated the prohibition against the monetization of U.S. Treasury debt by initiating Federal Open Market Operations (FOMO).

BM: As I said above, perhaps this was the plan all along. Getting the nose under the tent is a useful strategy for actions that must be shrouded in stealth.

IB: With the prohibition of gold ownership, the Real Bills market was destroyed. Businessmen will simply not draw Real Bills that would only be settled with irredeemable currency.

BM: It is done today, every day, in a different form. Revolving credit, which is exactly what Real Bills represented when used.

IB: With the ratification of the 17th Amendment, individual States as governing entities lost their seat at the table of power in the federal government.

BM: No, the states lost their seat at the table in 1865. After proving the point with 600,000 dead, the federal government had little trouble convincing states to tow the line. BTW, wasn’t the 17th amendment ratified at a time when the states controlled the selection of senators?

IB: I assume that by this question is meant, could Real Bills coexist with central banking? The answer is yes. They can, as long as the central bank currency is not protected by a "legal tender" provision.

BM: I am fully supportive of competitive currencies and banking in a free market.

IB: Of course, the ideal is to have a redeemable "National Reserve" currency based on the Real Bills Doctrine similar to the redeemable "Federal Reserve" currency created under the original Federal Reserve Act of 1913.

BM: No, the ideal is to allow competitive banking and currencies, with no one method or system supported by legal tender or other state mandated preferences over any other.

IB: It does not matter whether a "U.S. Dollar" is valued to be 1/20.65, 1/35 or 1/42.22 of an ounce. Any reasonable amount of gold that could be struck into a workable coin would do.

BM: EXACTLY. So when would there never be enough gold? The value of gold relative to the things gold would buy would adjust regularly with the supply / demand characteristics of the various commodities.

IB: Real Bills in and of themselves are non-inflationary. Their volume can expand and contract without causing any inflation whatsoever. It must be remembered that Real Bills are not "credit instruments". They are "clearing instruments" which facilitate that consumption items get to the consumer without first having to pay separately for every step in the production process.

BM: One more example of the reason for the confusion. They are clearing instruments (not needed certainly given today’s technology), but they are not credit instruments (although they came about because there was not enough gold, gold representing the value of the surplus). In and of themselves, Real Bills are inflationary to the money supply.

IB: The criticism I seem to detect is that the free-market quarter views Real Bills as credit instruments and therefore deems them inflationary. Real Bills are not credit instruments and inherently are non-inflationary.

BM: I hate to keep repeating myself, but must because IB keeps repeating himself. See my comment immediately above.

IB: I must correct you. I favor a "land value tax" which is fundamentally different from a "land tax".

BM: In one of our earlier conversations, IB introduced me to this concept. As much as I abhor all taxes, this bears some study. I maintain some interest because I can see it not as a tax paid to a state, but as a system that could likely be supported by a free market.

Bail Out the Banks

The original article at The Daily Bell can be found here:

http://thedailybell.com/1820/Bail-Out-Europes-Banks.html

The subject interview can be found here:

http://www.spiegel.de/international/world/0,1518,748239,00.html

DB: “There is no head-scratching over HOW banks became undercapitalized. There is only the assumption – a nearly religious one – that banks need to be recapitalized, especially in Europe.”

In the recent Rickard’s interview, he goes through the point of the world being bankrupt. If you could prepare a balance sheet for the economies of the world, there would be no equity, in fact negative equity. I would safely speculate this is a first in modern times, likely a first ever.

DB: “For Eichengreen however, the answer is not to cut spending. The tax stimulus is very ineffective, he says, because it tears another hole in the budget and rich people are not inclined to spend the money that they save with the cuts.”

Banks need to be recapitalized, but of course we can't do it with real savings (which can only be provided in any quantity by the "rich"). One more stupid economist convinced that spending is the path to creating wealth, and savings destroys wealth.

It is simple: true savings results in investment, investment results in productivity improvements, productivity improvements result in improving conditions for man on earth. Remove savings, and man’s condition on earth worsens. We have seen visible signs of man’s worsening condition in the Western world for at least 40 years coincident with the destruction of savings. It is now becoming quite visible in the Middle-East today, and likely soon the tide will turn in China.

DB: “The idea will be to put a basket of currencies in place via the IMF's SDRs that will include the dollar.”

For 100 years the economies of the world have been on the path of wealth destruction. They are at the end of that road. A new currency does not create new capital. It does not improve the state of the balance sheet. The “real stuff” hasn’t increased. The introduction of a new currency only results in the re-allocation of the previously existing real stuff. Real assets don’t increase, liabilities stay the same (in fact, increase, because people are fooled into thinking they have new, real capital).

DB: “We would hope that the chaos that Western powers-that-be are now inflicting on the world will result not in another elite-mandated system but a general breakdown of the abysmal fiat-money system.”

They may last long enough to implement the SDR scheme or some other, although events seem to be moving so quickly that this is not an even-money bet, in my opinion. They may not make it to this point. Whether before or sometime shortly after the introduction of another fiat money scheme, the system will fail. Of this there is no doubt. Smaller communities will be left to pick up the pieces and decide, for example, what to use as money.

Eichengreen (from the Spiegel interview): “But I worry that [bond traders] will begin to distrust the US soon too.”

This is why they will fail. The laws of economics will win out over the desires of man. He worries about the “distrust” of bond traders, giving away the fact that it is all a con game. There is no bond trader that wants to be the last one out the door. Sooner or later, someone will yell “fire”.

Coercion and Choice

http://thedailybell.com/1817/Is-the-Anglosphere-Driving-Militant-Islam.html

@Bill Ross

Thank you for the thorough post.

When he was alive, my great-grandfather (call him “Pops”) would tell the story of his old neighborhood, where he had a small market. He lived most of his life there, and knew many of the other shopkeepers, as they all grew up together in the neighborhood.

One day the police came to see him. It turns out pops was paying $20 a week to some local guy (call him “Muggsy”) for “protection”. Of course, the “protection” offered was to be protected from further aggression by Muggsy. I think you get the picture.

The officer wanted to know why Pops was paying this to a known ruffian, in fact Pops was funding Muggsy’s illegal acts. Pops explained that he initially tried to protest, but Muggsy would have none of it. One day Muggsy showed Pops a picture of a young girl playing in the schoolyard. That girl is my grandmother. Pops got the point, especially after his fellow shopkeeper went to the hospital for six weeks with multiple broken bones. Everyone knew why he was beaten, no one had to say anything directly.

So Pops explained to the officer that he found no good way out of the situation. In fact, it was when Muggsy told Pops to avoid telling the cops when he showed Pops his daughter’s picture. Besides, Pops was no dummy. He knew that the cops were in on Muggsy’s racket. Pops knew he had nowhere to turn, so it was best to just pay and shut up.

Pops now had a problem. The officer said that Pops was under arrest for aiding a known criminal enterprise. Pops was stunned, yet at the same time resigned to this. Both feelings were caused by the same irreconcilable conflict. He was coerced, and there was no good choice for him to make in this situation. Sure, he sometimes thought about moving to another town, but even if he could scrape together the capital to do it (hard to do when Muggsy was sure to take every excess earnings, thus disallowing savings), he also knew, from stories told by his cousins who lived elsewhere, that pretty much every city he went to offered the exact same condition – every town had a Muggsy. Pops knew nothing good would come from him fighting Muggsy, as he would likely end up leave his family helpless, as the family was in no condition to care for themselves…too young, too old, etc.

End of story.

Now, there isn’t one ounce of truth in the story I just told. Just using it for an example.

Choice (and therefore responsibility for choices made) ends where coercion begins. I do not say this is an absolute, one-zero event, as even in situations of complete coercion, we make judgments about how far we are willing to go, and how much we will protest (either actively or passively). Alternatively, in cases of relatively minor coercion, individuals are not automatically excused from any and all acts thereafter committed. Even major coercion does not relieve one from receiving justice for major crimes. “I was just following orders” may be valid for cleaning the latrine or guarding prisoners of war, but not for the uses that this statement has purportedly been used for in the past.

I consider this in today’s world. There is virtually nowhere to go in this world to avoid supporting one regime or another. Yes, there are relative differences in the regimes, but even these must be weighed by evidence and personal circumstance.

Therefore I find escape by jurisdiction is not a possibility (perhaps to degrees, but you don’t seem to leave room for degrees in your statements). What about escape within a jurisdiction, as you point out you have done to some (or some great) degree? I can imagine this, but not absolutely.

Certainly, one can decide to not provide service to another of his fellows. No income tax. I got that, perhaps with independent wealth (but where did this wealth come from? Was it not taxed at one point in time?). What about no gasoline tax, no property tax, no sales tax, etc? How are these avoided? I can envision a life of complete sustenance and solitude on a farm, never transacting business with anyone else. But how does one have a farm without paying property tax on it? Perhaps lease it from the owner? But then the owner is paying property tax on it, and the tenant is funding this. The circle has no end point. What about going to the market in town? Even doing it by horse and wagon still places you on roads paid for by the public purse. What about going to court for the inevitable fight? This certainly requires a trespass of some sort, whatever fully justifiable reasons one might have. Tax on the cable bill? Internet connection? (Wait, how does one get around that one and participate in this forum? :-))

Certainly, one can choose to provide useful services to another of his fellows and not declare the income or pay the tax. I have read of such people. Cash transactions and barter can be utilized, and are certainly difficult for authorities to track. (Wait, no cash transactions, as that is using fiat currency which inherently represents stolen wealth.) Living in the underground economy is a difficult decision for anyone to make, as the risks seem significant, even more so if one has to think about caring and feeding of a family. And still I find no answer to property taxes, sales taxes, using public roads, etc. or using cash….

So I come back to judgment and degrees. Yes, I can agree that to varying degrees, all residents of a geographical region are in some way responsible for the actions of those who claim governance over that region. Either in this world or the next, there may even be judgment. To be just, this judgment must recognize: the same point where coercion begins is also the same point marking the beginning of the end of choice. And without free choice in action, it is difficult to assign responsibility. It takes…judgment. And this isn't absolute.

The Art of NOT Being Governed: Civilization?

"If we examine the centripetal narrative of civilization closely, it is striking how much of the actual meaning of "being civilized" boils down to becoming a subject of the padi state."

Reactions by reflex: there is the state, or there is anarchy (in the wrong definition of the word); civilization requires state enforced rules; man living outside of the control of the state is a barbarian, uncivilized.

Yet are these true? Or is the opposite so? Consider: the state is the monopoly of legalized force over a given jurisdiction. How is living under such a system described as "civilized"? Some men have authority to force others to do as ordered, to pay as ordered, to ingest as ordered. With disobedience comes punishment, up to and including death.

Relationships defined by force is called civilization? How is this so? If your neighbor told you to trim your hedge or he will shoot you, would you describe him as civilized? If he said he didn't want to work and that you should pay his rent, or else he has the authority to put you in jail, with what term would you define your relationship? Civilization does not come to mind.

Voluntary relationships or forced relationships: if you observed two societies, one living through voluntary exchange and the other living through force, which would you call civilized? In which would you choose to live, if offered the choice?

There is nothing civilized about using force to get what one wants. There is everything civilized about a society where voluntary relationships define the society. I avoid for now the concern of "living in utopia, it will never work." This isn't my point. The issue is what we consider as civilized, and what we consider as barbaric. Without the state, society would collapse into lawlessness and crime. I argue that, in fact, lawlessness and crime define the very nature of the state.

The Art of NOT Being Governed: Population Control via Slavery

"...none of these padi states flourished except by slave-raiding on a substantial scale."

So says the author. "...there was no state without concentrated manpower, and there was no concentration of manpower without slavery."

Such observations fly in the face of the standard history, that as the state developed, so did civilization; that people voluntarily migrated to the protection and luxury of the state. this certainly seems not to have been the case.

But is it so surprising? When offered the choice of a life free from legalized coercion, or one where your living and breathing are by permission, which choice would most people make? Even if there was likelihood that the organized state society offered some opportunity for stability, most would choose freedom.

Consider the Great Wall; was it built to keep invaders out, or to keep the subjects in?

In any case, the history of slaving is not obscure, it is well documented because the taking of captives was one of the prime public purposes of statecraft.

It is an interesting and thought provoking subject. Where people had some choice of living under a state or living outside of it, the choice was overwhelmingly to live outside of it; conversely the primary means of populating the state was by force.

Today, the options of living outside of the state are virtually non-existent. But what of this? When there was the option, it was clear that living under the state was slavery. Just because there is no "opt-out" clause today, does this make one's life under the state any less the life of a slave?

My intent is not to equate life in a Western state to slavery in the West of the 17th and 18th century. I only raise the issue: is it any less slavery today than during times past, considering that living under the state requires a captive population, one where force must be employed to keep the people subject?

The "Wealth" of the West

http://thedailybell.com/1799/Is-the-West-Winning.html

Posted by Bionic Mosquito on 3/1/2011 10:36:51 AM

"Yet the one certainty in this century of Western angst has been that despite repeated war and economic crisis, the West has remained supreme throughout." UK Telegraph/Jeremy Warner

It often strikes me that, even after at least 100 years or more of abuse, the West remains visibly "wealthy." I have concluded that this is solely due to the enormity of wealth created over several hundreds of years. Wealth not just in terms of financial assets, but culture, art, philosophy, etc.

Consider the inhabitants of the USA. Many live on this storehouse of wealth, not realizing they are consuming it daily and producing none to replace it. What storehouse? The work of Locke, Paine, Jefferson, and countless others ' the philosophy of individual freedom and liberty, all men created equal, etc. many still believe they have it, despite never having read any of it directly or in any way understanding it.

How is it being consumed? Every act of Congress, Executive Order, Patriot Act, financial bailout, public education, etc. Each one chips away at the previously stored wealth of the philosophy of freedom and liberty ' call it classical liberalism.

Yet, many still believe they live free. It speaks to a) the amount of wealth that was once stored in this idea, and b) how very long it can last even if not replenished.

What of the monasteries and universities of Western Europe. Consider the centuries of training, education, development of philosophy, etc., behind each one of these hundreds of entities. No, not all of it pointed to liberalism, but much contributed toward liberating events culminating in the 17th and 18th century.

I have mentioned before: Jacques Barzun (From Dawn to Decadence) and Martin van Creveld (The Rise and Decline of the State) cover this (in different ways) much better than I can. They both conclude the notion of state is at an end, and smaller more localized structures will replace it.