What Banks are Really Doing Parts 1 -5
Rance Foulston
PART 1
THE VALUE OF TIME DEFERRAL IS POSITIVE, NOT NEGATIVE.
THIS VALUE OUGHT TO ACCRUE SPECIFICALLY TO THE CONCERNED PARTIES
OF THE EXCHANGE AND GENERALLY IN AN EQUITABLE MANNER TO THE TOTAL ECONOMY.
INTEREST CHARGES DISTORT AND SUBTRACT FROM THIS BENEFIT TO THE ADVANTAGE OF THE FINANCIAL FUNCTION- banking.
THE LOSS TO THE PARTICIPANTS IS UNOBSERVED DUE TO THE EFFECT OF THE TRANSFERENCE OF IOUs INTO THE AGGREGATE ECONOMY- the money supply.
EFFECTIVELY, THE PARTIES TO THE EXCHANGE ARE MADE TO PAY FOR THE BENEFIT (WHICH SHOULD RIGHTLY BE THEIRS TO ENJOY) AS IF IT WERE A COST.
THE LOSS CAN ONLY BE TEMPORARILY OFFSET BY AN INCREASE IN PRICE.
THE LOSS IS TO THE PARTIES TO THE EXCHANGE AND TO THE ECONOMY AS A WHOLE.
PURCHASING POWER TRANSFERS TO THE FINANCIAL FUNCTION- banking.
REAL VALUE IS CREATED THROUGH EFFORT IN THE COMMITMENT TO MEET THE INTEREST OBLIGATION.
THE VALUE OF THIS EFFORT DOES ENTER THE ECONOMY IN THE FORM OF ADDITIONAL ACTIVITY BUT IS LOST TO THE BORROWER.
THIS ADDITIONAL VALUE ACCRUES IN THE HANDS OF THE FINANCIAL FUNCTION.
THERE IS A COMPOUNDING EFFECT WHICH DISTRIBUTES THROUGHOUT THE ECONOMY IN AN EVER-INCREASING LOSS TO ALL WHO WOULD PROVIDE REAL VALUE IN TRADE.
THIS IS THE PRIMARY CAUSE OF THE ECONOMIC DISTORTION WE CALL “INFLATION”.
SINCE THE LOSS CAN ONLY TEMPORARILY BE MADE UP BY FURTHER INCREASES IN ACTIVITY (GROWTH) WHICH ALSO ADD TO LOSSES, WHICH MUST FURTHER BE MADE UP, THE COST OF THE FINANCIAL FUNCTION (LOST PRINCIPAL, INTEREST, COLLATERAL, TIME DEFERRAL BENEFITS, OPPORTUNITY COSTS, OWNERSHIP BENEFITS) CAN NEVER TRULY BE PAID.
THE ULTIMATE RESULT WILL BE THAT ALL VALUE WILL EVENTUALLY ACCRUE TO THE FINANCIAL FUNCTION- banking.
Monetary reform would seem to be an imperative.
From a financial/economic point of view, there are three components of loss to the
collective economy that are being captured by the banking/financial function. These costs are
somewhat additive, but there are also some overlaps. I am sure, however, that the total is greater
than any one of the three components alone. The losses are a combination of the following:
1. the benefits of time deferral
2. the claims to principal, interest, and collateral.
3. The benefits of compounding
Date: Sun, Oct 26, 2008 at 12:22 PM
Subject: Money
Hello all.
I have decided to send this into cyberspace, which I may do with all of your help. �I hope you all may be inclined to read this yourselves, but even if you are not, please send this to any on your lists as I believe this kind of discussion is extremely important right now. Please exercise discernment and consider carefully, but please consider.
Thanks.
Rance Foulston
With crisis comes opportunity. We now have a huge opportunity (the world
financial “crisis” at hand- the potential to a waken from our slumber into
Surely it is time to seriously ask ourselves, “Where are we going? Does this seem like
the right direction?” It is my feeling, and that of many others that we are currently in a time of
crucial importance in the history of Man. We must decide rather quickly if we are to stay the
course of our own self-destruction or accept responsibility for our collective fate and turn this
ship around.
The following essay was intended to be, and yet may become, a part of a larger work
encompassing many topics that are currently subject to a great deal of misunderstanding,
misinformation, and misdirection. All of these subject areas have been manipulated and
disguised by a systematic control of information by those whom we have entrusted to lead us into
a better world, but who have abused their power in their own favour.
The major subject areas which have been manipulated and distorted by controllers in
power now and throughout our recent known history are: ideas about God; ideas about science
and the nature of reality, consciousness, etc.; ideas about health and biological integrity; ideas
about life in the Universe beyond the three dimensional world with which we are familiar; ideas
concerning our true history as a species on this planet, among others. These ideas have been
propogated by self-interested factions in our religions, educational structures, our medical and
pharmaceutical establishments; our governments and leaders, and by the established structures in
general.
This section concerns the money function and the institutions who manage it. The
monetary system is a crucial pillar of structure in our civilization. It is important that we
understand to whom it belongs and whom it should serve.
In hopes of finishing the entire work in one volume which would hopefully relate all of
the relevant social distortions which are affecting all of the people of the world today and, in my
opinion, impeding our potential for the ultimate evolutionary leap, I have delayed the release of
this discussion. There are other reasons why I haven’t put this out there, not the least of which is
my own lack of confidence in the premises and conclusions of this work concerning money. I’m
not an “expert”. I’m not an “authority”.
However, we are now (October, 2008) in the midst of a so-called “financial melt-down”
or “global financial crisis” or whatever label you prefer of the many which generally have the
effect of undermining confidence, thus making predictions of global economic disaster a selffulfilling
prophecy. The timing seems right, then, to introduce a line of thought which will
hopefully bring us all around to a clearer understanding of the true situation regarding the nature
of the institutions controlling “money”.
Part of the urgency I feel comes from the seemingly highly organized collusion between
the governmental structures and leaders of the world, most of which we are usually unaware of,
but some of which leaks through. One such case came to my attention a couple of days ago when
I received an e-mail containing video of our Canadian prime minister, Stephen Harper, and the
Australian prime minister, who I believe is Kevin Rudd. In this video, they are both making
identical speeches promoting their countries’ participation in the Iraq military initiative launched
by the Bush administration in the US.
The speeches were made days apart from one another in March of 2003, but the content is
identical down to the word. At the time of these speeches, neither one of these gentlemen were in
power. They both are now. (Apparently, these videos were shown by the CBC television
network. I missed it.)
The significance of this revelation should be clear to all, but we have heard nothing near
the scale of backlash which is warranted by this news, in particular as our country is now going
through an election process.
It is becoming evermore obvious to me (and many others in the world) that some unified
power is directing the nations of the world towards its own secret ends at the expense of the
entire population. Therefore, I believe it is of extreme importance that we recover our wits and
take back the power which only we can truly have- the power to determine our own destinies. In
the interest of the common good, I believe this discussion may lead us in the right direction. This
is certainly my sincere hope.
One should certainly not take this work as coming from any authority. I intend that
sufficient interest is generated in the topic that we might consider wide, open, serious debate.
Ideally, I would hope that this debate becomes a world wide endeavor towards freedom. I am
most grateful to any who will take the time to read, understand, and spread the message of this
essay.
The document is quite lengthy and can be rather tedious at times. However, I strongly
urge you to read it through to the end. If there are parts which tend to bog you down, try skipping
over them, at least temporarily, to the next section. While I will be the first to admit that I may
be off the mark on some or all of this, please think about it and decide for yourself. There may
be improvements to come in a future version, but my sense of things is that the essential message
is accurate, timely and urgent.
The main ideas of this discussion on money are:
1. Money is an IOU, not a commodity.
2. Banks have no money to lend because the value of the money comes from those
who make and keep promises.
3. Banks and governments are merely accountants who are responsible for
maintaining the value of your work and credit. (All those who have lost or are
losing their homes through mortgage defaults might at least ask the banks or
“lenders” to prove that they have actually “loaned money” to the “borrowers”.)
4. Taxes, Interest, (and Currency adjustments?) are largely, if not wholly,
unnecessary.
5. Economics, Government, and related financial machinery must be decentralized
down to the local, observable, minimum functional level, such that a TRUE global
society, one which recognizes the value of diverse global cultures, may emerge.
6. The prevailing structures of the world have emerged due to our own acquiescence,
apathy, and self-imposed dis-empowerment. Regaining our rightful status is also
ours to do. We are ultimately responsible for our own fates and that of this planet.
Solutions are alluded to as one goes through the material, but they have not been
thoroughly considered thus far. Tentatively, I would offer the following points in considering
solutions:
1. There is nothing essentially problematic with the accounting systems as they now
function. The main problem lies only in the inappropriate claims to ownership of
the benefits of the system- i.e. the claims of governments and banks, for instance.
2. De-centralization of government and financial power would seem to be in order.
3. Canadians (and all other countries for that matter) require proper constitutions
which reflect the sovereign rights of individuals as above those of the state. (See
appendix 5)
4. Parliamentary, monetary, and legislative reforms are in order.
Imagine a world where you have up to ten times the purchasing power with the same
amount of effort you currently expend. Or better yet, one in which you need “work” only 10% of
the time to meet your current needs and the rest of the time is spent in any way you wish which
feeds your spirit in the fulfilling way that was originally intended. A proper understanding of the
following material leads directly to this kind of world, if only we have the foresight and
determination to take back what is rightfully ours- the power of money.
Other points will certainly occur to a reader. As this document matures, solutions may be
fleshed out.
Note: This is not a technical or formal financial document. The words chosen have been chosen
to be descriptive in a way which a layperson will understand and are meant to be clear in
the context. To the extent that I may not have succeeded in keeping things clear and
uncluttered with financial jargon, I apologize. The reader may search “financial glossary”
on the net for formal definitions of certain terms, however this may only tend to confuse.
For instance, the term “credit” is defined (Yahoo search engine) as “money
loaned”. As the reader will soon discover, this definition is entirely too simplistic and in
fact misleading when we really begin to understand what money is. I have used this word
basically in the same sense as the use which we all understand when one has contributed
something of perceived value for which recognition in some form is appropriate, i.e.
where “credit” must be given in recognition of value given.
As another example, the term “money” is more narrowly defined in the glossary
than the way in which I describe it. (A broader term in the glossary which better
incorporates my understanding of the word is “money base”. As I mentioned, it is best to
try to understand these terms in context of the discussion. Reference to the glossary may
offer clarification by agreement or by contrast. Many financial terms have strict legal
meanings which often differ from our common use of the terms. In my opinion, this is
not entirely unintentional much in the same way that legal terms often vary in their
meanings according to the degree of clarity that is intended by the user and the desired
outcome of conveying deliberately confusing meanings.
In honour of those who have gone before:
There is nothing truly original in this essay on a point by point basis. Most or all of this
has been put forward by others in this country and abroad at various times in our history. There
may be differences as to approach or definition and even complete disagreement as to some
concepts, but in essence this essay is just another way of saying what many others have said in
the past in their own ways. In order to wrap my head around what they were saying, I had to
approach it from my own viewpoint. In many ways, my route was much more circuitous and less
intuitive than theirs. However, we share a common belief in the essential requirement for
monetary reform and I am most grateful for having been led to their thoughts and writings on the
matter.
Thank you.
Money, Money, Money
“Money - it’s a drag...” Pink Floyd
There are so many social and economic problems that we seem inundated with them.
Each one seems to stand alone as a problem unto itself, each persisting without solution. Any
remedy seems to be short-lived at best, if indeed it serves any purpose at all. If anything, each
remedy seems destined to exacerbate the problem it is meant to solve.
The best example of this is the environmental problem. Environmental problems
generally arise out of economic and industrial activity. The best solution to any given
environmental problem is to quit doing the thing which causes the problem in the first place.
Unfortunately, this is never the adopted solution because this would mean that we would have to
give up all or most of the perceived benefits offered by the industry. This is never considered as
a serious alternative. The result is that if we cannot find a remedy which will allow us to
continue doing what we have always done, then the band-aid solution will have to do until
something ideal is found. Of course, something ideal is never found and the pollution just gets
worse until we have a crisis. We are approaching crisis situations in many environmental arenas
at this time in our history. I, for one, do not believe it is practical or possible to save ourselves
and the planet by independent solutions to each and every problem. Environmental degradation
is systemic and arises out of our way of doing business in the world today.
Aside from problems with the environment, we have a multitude of challenges with
respect to diminishing energy resources, increasing food shortages, spiraling infrastructure costs,
economic and political turmoil within and between many countries in the world, decreasing
standards of living and quality of life, and of course, war, to name a few of the more obvious.
While it doesn’t seem likely that all of these challenges can be met by any single solution,
most of us believe that there is one thing that would go a long ways to alleviating the majority of
them - money. Money is the grease that makes all economic machinery run better, or so we
believe. We think that if we throw enough money at any given problem, the problem will soon
disappear. While we may believe it, it is arguably false. Money has not solved any of our major
social problems. It may have temporarily delayed the inevitable, but it has provided no lasting
remedy. If anything, it is more likely that money itself is the problem, because while money
cannot solve our problems it certainly seems to be involved in the creation of many of the major
ones.
What do I mean by that? Hopefully, the following lengthy discussion on the nature of
money will offer some perspective.
Questions on money
The following is a discussion of the notion of money more as it should function rather
than how it is treated or thought to function in practice. The process leads us to a way of
thinking that questions the role of banks and governments in their duties to the people they were
created to serve within the financial/monetary systems.
While it often seems as if we the people exist to serve these institutions, it behooves us to
remember that they, in fact, exist to serve the interests of the people as a whole in a manner
which reflects our collective ideas of individual freedom and value within a universally
beneficial economic and social system. We are encouraged by these very institutions in their day
to day rhetoric to believe that this is in fact true. The arguments below do not support the notion
that we are well served by the status quo.
What is “money”, anyway?
It’s hard to imagine a more obvious answer, isn’t it? “Money is something you can buy
things with, but that you never seem to have enough of.”
There are many versions of the origin of money. Early in our known western history, the
coin that was used for money was usually made of something that was valued in and of itself,
like gold, for instance. The real purpose money served, however, was simply that of accounting
for IOUs. All other functions that came after that are derivatives of money as IOUs.
Cash in hand is the simplest form of money today, and most universally recognized as
such. It represents the fact that the holder is owed something. It could be said, therefore, that
money is a debt. But it is not a debt that anyone in particular is responsible for paying. Cash in
hand as currency of a country is a universally accepted (within the country) representative form
of value which may be exchanged for anything deemed by the respective parties to be worthy of
exchange at a price. Our universal agreement, by law, to accept such for value is what makes
currency negotiable legal tender. Therefore, its essential function and value is as a medium of
exchange.
Within the concept of money (cash in hand, positive balance accounts, etc.) as debt, or a
universally accepted IOU, you have the general population which is willing to give value for this
IOU in the form of goods and/or services and to take the IOU as payment. They then become the
ones to whom something is owed until such time as the IOU is cancelled by a further transaction.
In this way, IOUs circulate through the population and the economy until they are eventually
cancelled. They are cancelled when everyone who has issued an IOU has been given value for
value. In effect, this is a theoretical condition. Because of the dynamic nature of commerce,
there is always a supply of IOUs in many various forms floating around in the economy because
there are always those who have not yet purchased to the full extent of their outstanding IOUs.
In a broader sense, any instrument which is negotiable for value is a form of money if it
is generally acceptable as a medium of exchange or as a receipt which may be exchanged for
value. The more universally acceptable the instrument is thought to be, the more likely that it
will be treated as money.
What is the difference between cash money and a promissory note?
Cash has no conditions applied to it. Presumably, the value is guaranteed because it has
already been earned. It is not a promise by the holder to pay value. He has already given value
and merely holds the receipt which recognizes it. The one accepting this note is therefore
confident of its value because of this and because of its universal acceptability as representative
of value given. Even if the note held by the purchaser had been borrowed, it is accepted because
it will ultimately be honored in any case. Currency is a generic universally transferable
representation of value. In the case of cash, value has been promised by society in general.
A promissory note, while it may be thought of as a form of money in that it may be
negotiable and therefore represent the eventual transfer of value, also has the feature of
performing somewhat like a contract. It represents the promise to deliver value at some time in
the future to someone in particular. It is money in the sense that the holder of the promissory
note is holding an instrument which is also an IOU, albeit one from a particular individual. Its
ultimate value is not guaranteed by the public at large, but only by the honour and ability of the
one who promises. It might be said that the promissory note is much like the original version of
an IOU.
Why currency instead of individual IOUs or promissory notes?
While all of us would like to think that our IOUs are good, the public at large has no
practical way of knowing this. Thus, currency recognizes the value of promissory notes or IOUs
held by individuals in the total economy and honours the aggregate quality of the promises.
Currency is the form of the promise made by the public at large to recognize the value given by
the holder. In that sense then, cash is also a promissory note (from the public to the holder), but
it is universally transferable and has no time requirement.
If you can picture each of us in society as holding IOUs from our many obliged friends
and employers, you can see that it is much more convenient if we can convert these into a
universally accepted form. This is, in fact, what we all do. We accept a cheque or a deposit by
our employer into our account. The bank keeps a record of this. The account itself is a
recognition of our accumulated credits or IOUs. When we write a cheque against this account,
we are asking the one to whom we write the cheque to accept our IOU. The bank releases the
funds only in the sense that he witnesses that the credits have in fact been earned and are
available. Subsequent accounting by the bank will reflect that our IOU has been transferred to
the one to whom we have assigned the cheque. The bank also offers a further service in that they
give a degree of confidence that the credits will be honorably transferred.
All of the different forms of transfer and accounting are forms of money as well as cash.
They are all forms of currency in that sense. Paper or coin currency is not necessary to represent
the value given as long as other forms are acceptable to the concerned parties. Electronic
accounting of credit is a valid form of money. It simply serves the purpose in a different way.
The only reason for a government’s issuance of currency is to provide a paper (or coin) form
of credit (IOU) which may at some times be necessary and one which is the right of all to use
rather than any other form. The money/credit belongs to you. The form of it in cash is merely a
service we all provide to one another through the agency of our government in order to achieve
the benefit of universal acceptance and recognition of our value given. Banks also serve this
purpose by their accurate accounting of our credit and can be thought of as our agents in this
regard as well. (The task of reminding our governments and the banks to whom they have given
charters as to their responsibility in this regard is one of the objectives of this discussion.)
One major difference between paper and electronic money, however, is that the bank will
never run out of electronic money. In that sense, in theory at least, there should never be a run on
the bank due to a “cash shortage”. If the accounting correctly records your credits, you should
have no danger of losing it. It should therefore be perfectly reasonable to expect the bank to
guarantee your (IOU/credit) deposits.
So money is debt. Debt is money. It’s only a question of whether you are the holder of
the receipt (money) which recognizes value given or if you are the one who has promised value
in the future (debt). Our general understanding of money, however, is that it is something which
allows you to buy something if you have some of it. We fail to think in terms of the fact that, if I
have money, then I am holding a receipt for value given which will be honoured by (almost)
anyone. We further fail to think that this represents society’s debt to the holder, a debt which
must eventually be cancelled through effort which must come from society (the economy). This
is why federal governments note cash and other cash like instruments that are in circulation in the
economy on the liability side of the balance sheet.
Money (not “borrowed”) represents value already given by the holder but for which he
has not as yet been paid in fair value (which would be the object of having given over the value
in the first place).
Money is a promise to pay (deliver value) as opposed to a method of payment. Payment
is actually received by you when you turn the IOU over to someone else by your purchase of
goods or services. This is a cancellation of the (society’s) debt to you as represented by the
money you held, but you have merely passed the IOU on to whomever you purchased from. At
some point in the future, they will pass it on again when they purchase something of value.
In theory, the eventual cancellation of the debt (the “money supply”) will come in due
course as the value which is offered by all members of society gradually works its way through
such that we all receive our fair payment in value. This debt is therefore of a temporary nature
and operates as a form of accounting until balance has been reached between all parties. As
previously mentioned, the dynamic nature of commerce ensures that this balance is also dynamic
and the IOUs merely circulate and only increase or decrease generally as a result of the changes
in the level of economic activity. (I apologize if I am being repetitive, but there are times when
repetition serves to gel essential concepts, for myself as writer as well as for a reader.)
It would not be inaccurate to say then, that we are circulating debt when we are
circulating money. It is impossible to have money without debt because they are the same thing.
It should be obvious then, that money/debt is a valuable economic tool which allows broad
recognition of value and service and maintains a certain desirable level of activity among
society’s members. The only alternative to money is direct trade without the value of deferral
that is offered by generic IOUs which we call money. (See the following discussion on the “real
value of deferral” in the section on interest.)
Is there a difference between money as a form of debt and the kind of debt where
you request funds from someone with a promise to repay in the future (e.g. bank
“borrowing”)?
If I loan you cash, you will have a debt. The cash is money that only one of us may
spend. I have thus given you something which you would not otherwise have and which I do not
now have because I have given it to you. We cannot both be holders of the same money, in other
words.
In the case where you are requesting a loan from a bank, you are not asking for someone
to loan you their money (i.e. their purchasing power) per se. The bank does not loan you
someone else’s money. It is responsible for ensuring that deposits, which are credits representing
outstanding IOUs to you and others, are properly accounted for. It is your right to cancel the
IOUs (owed to you) by transferring them to whomever you see fit (e.g. buy something). This is
done by way of yet another IOU, whether it be cash, cheque, wire transfer, or what have you. In
the case of a withdrawal, there is no question of availability of funds, only of appropriate
accounting of credits and the means of transferring the credit from one type of IOU to another.
So, in the case of a bank loan, you must, in fact, be receiving the money from the ample
coffers of the bank itself, right? But are you really?
This is a crucial question, the answer to which is at the core of the issue with respect to
interest and the so-called “cost of money”.
Let’s look at a theoretical bank balance sheet and what may be happening with a bank
loan (This is my personal view of how his may work. I have no access to bank books or
accounting to offer to the argument, but I believe the following will suffice for the purposes of
the discussion):
Condition A. Condition B.
If a bank “loans” money: If a bank does not “loan” money:
bank balance sheet bank balance sheet
Assets Liabilities Net Assets Liabilities Net
before loan before loan
1.
cas h 5 0 5 0 0 0
loan loan
2.
cash 5 deposit 5 cash 0 deposit 5
loan 5 loan 5 0
int + 5+
withdrawal withdrawal
3.
cash 0 deposit 0 cash 0 deposit 0
loan 5 loan 5 cheque 5
int + 5+ int + int+
depositing depositing
4.
cash 5 deposit 5 cash 5 deposit 5
loan 5 loan 5 cheque 5
int + 5+ int + int+
repay loan repay loan
5.
cash 5 deposit 0 cash 5 deposit 0
loan 0 loan 0 cheque 5
int + 5+ int + int+
In condition A., the bank has cash available to fund the deposit liability that represents
what you have borrowed. It records the loan on its balance sheet as an asset ( 2.). When you
withdraw the funds from your deposit, the cash is used to fund the deposit (3.). As you deposit
your earnings into your account, the cash again shows as an asset of the bank with an offsetting
deposit liability because this deposit is owed to you (4.). If you choose to repay the loan out of
your account, the effect you see is that the loan has been cancelled, but it is your deposit
represented by the cash asset that is used to pay back the loan. Since you are now removing the
bank’s liability by removing your deposit, the cash asset is retained on the balance sheet (5.).
The bank started this process with 5 dollars and ends it with 5 dollars plus the interest
earned. Interest earned might be considered a return on invested capital in this situation.
In condition B., the bank merely recognizes the value of your IOU on the asset side of the
sheet and offsets it with a deposit liability (2.). No cash is available to fund the deposit, so you
cannot withdraw cash. If you wish to withdraw, you write a cheque which effectively exchanges
the deposit liability for another liability (designated “cheque” here, 3.) When you deposit to your
account, an asset (cash) shows up on the balance sheet with a corresponding deposit liability (4.).
Repayment of the loan will result in the same process as condition A and the cash will be left to
fund the cheque liability remaining on the bank’s books (5.).
If the one to whom you wrote the cheque asks for cash from the bank as payment prior to
your repayment, which it is his right to do, then the only asset left to fund the deposit liability
with is your loan. It’s a simple matter for the bank to merely cancel the loan as paid and act as if
you paid it out of a deposit, but the fact is, there would really be nothing with which to pay the
loan because there is no asset available to pay it with. If your IOU the bank holds as an asset is
the only thing on deposit, who is loaning money to whom?
For condition B., the bank had no assets invested at the beginning and the net result at the
end is the interest on your loan. This represents a return without invested capital. For the
privilege of paying interest, you put up the promissory note which backed the deposit liability,
you wrote the cheque which was backed by your IOU on the bank’s books and for which there
was no cash or bank asset previously available to fund the cheque, and by depositing your
earnings, you provided the cash to back the cheque. In other words, you filled both sides of the
balance sheet, providing all of the assets plus interest and meeting all of the liability
requirements.
The long and short of it is, if the bank is not actually loaning you money (condition B),
you shouldn’t be paying interest. In fact, it might be said that you are loaning the bank money so
that it can charge you interest.
At this point, it is probably premature to insist that the bank is not loaning you money, but
pretending that they are. However, in addition to other factors we have thus far discussed, the
fact that you cannot withdraw cash with which to purchase out of your loan deposit, leads me
(and others) to think that you are funding the entire process with your IOU.
What is it that the bank would be offering to “loan” you but their own IOU? But their
IOU is a promise to deliver value to you, which is the function of all money. They promise to
deliver value to you in exchange for what? Your promise to deliver value to them, of course. So
what value are they offering in exchange for your promise to them? The only thing of value that
they have to offer is the value you have promised in your note which is generally guaranteed by
the assets you have put up as collateral. So their promise is contingent on your promise and their
ability to deliver value is contingent on your ability to deliver value? Sounds pretty circular,
doesn’t it? Aside from the complexity of the accounting that accompanies the lending process,
let’s conceptualize the banking service as a go-between which accounts for transactions.
As can be seen in the lovely piece of art (see figure), isn’t the bank merely passing along
IOUs? The real “lender” is the one delivering value to me in the form of whatever I may be
purchasing. He will receive his value from the next lender when he purchases and passes on the
IOU. At that point, he has given and received value or balanced his lending and purchasing so
that he owes nothing and is owed nothing. The last lender in line is effectively the present holder
of the IOU which I am ultimately responsible for.
There is little or no interest paid to a lender of value between the time where he lends
value and the time where he receives it by purchasing. The durations are relatively small from
one transaction to the next. The bank, on the other hand, is collecting interest throughout.
If the above diagram is an accurate description of things, one might well ask why the
bank is receiving interest instead of the lenders of value. One might also ask why we can’t
provide this accounting service to ourselves virtually free of charge. In an alternative system, the
bank might function basically as it now does, but in the accounting service capacity without the
claims of ownership that now accompany it.
The above diagram is illustrative of condition B from the balance sheets earlier. If this is,
in fact, the way things are actually working, the bank is not really fulfilling the function it is
claiming as a lender. It also seems inappropriate for the bank to claim the loan as an asset and to
charge interest on a loan when value is given by the one who accepts my cheque.
If the last lender in line is the one who is owed value, where is it to come from but from
me? The bank claims my loan as its asset. How can both of these lenders claim the same asset?
If the last lender is the one who has given value, shouldn’t the loan be his asset? Shouldn’t it be
a liability on the bank’s books? Should the collateral also be secured in this last lender’s name?
But the lenders just keep on passing on the IOU, taking their payment in value from the
next lender in line who will again pass on the IOU.
If I default on the loan, the bank is the one responsible for collecting, but for itself or for
someone else? Let’s look at that for a minute.
The case of default
Under condition A from the above balance sheets, if I default on the loan, the cash which
was available to cover the principal amount is gone and there are no forthcoming deposits. The
bank has lost its contribution to the asset side of the balance sheet and my loan no longer has any
value. Both assets and liabilities go to zero. If collateral was offered, the principal may be
recovered here in the bank’s favour.
Under condition B, if I should default there is no cash available to cover the cheque and
the only thing left on the balance sheet is my loan which has no value. The bank is in a deficit
position which must eventually be reconciled because someone is providing value in the amount
of the cheque. The collateral, if there is any, should cover the principal, leaving the bank at zero,
in theory.
What if I am in default and I owe the money to a contractor who has delivered value to
me and taken my (the bank’s) cheque? The cheque will not be honoured by the bank (NSF) and
the contractor will be in competition with the bank for the distribution of my assets for unrealized
claims. Generally, the bank will hold a superior security position even though they have
contributed no value. The IOU will go no further at this point.
Depending on how long the bank has been collecting interest, they may have contributed
nothing up to the point of the default, but they will have been in receipt of interest payments.
Interest payments are ostensibly paid in consideration of the principal as the bank’s contribution
(my loan funded by my promissory note, backed by my collateral, all of which provided the
funding basis for the cheques), but the bank was not required to provide anything until after the
default. Thus, no time, for which interest is ostensibly paid, has elapsed from the time of the
bank’s contribution (my loan...etc.) and the return of its value in collateral, at which time the
bank uses my value given in the form of the collateral to meet my obligations. To this point, I
have funded everything.
Now, let’s say that I have written a cheque to a home builder for my house and sometime
later I default on my mortgage payment. Undoubtedly, since a house is an expensive item, my
IOU has been split into a myriad of subsequent IOUs, all of which will be further split later on.
From the above diagram, it is possible to see that my IOU can be passed along such that it
eventually becomes virtually lost in the sea of IOUs - the “money supply”.
In the event of a default, how would we properly allocate the rightful distribution of
collateral (if there is any) to the last lenders? They are still passing on IOUs that are being
honoured for value, so they are unaware of their temporary status as the rightful claimants to the
collateral as deliverers of value. Since they are only concerned with obtaining value for their
IOUs, which is representative of the value already given, they are unaware and unaffected by my
failure to meet my obligations. The IOUs continue to be passed into the system as if they had
value unless the default is somehow discovered and properly taken account of. But how can it
be? What process do we know of which will adequately rectify this loss in a just fashion?
Presumably, the banks are passing IOUs amongst themselves and we would hope that
there is eventual reconciliation. So, among the banks, through interbank transfers, the accounts
become reconciled, but is there a point where the value which I have failed to deliver to the
economy by my default is actually made up? Bookkeeping entries and writedowns do not make
up for lost effort on my part. Even if there is reconciliation among the banks which would
account for the loss on the bank’s books, this is again only a bookkeeping entry. The bank
(system) gave no value and so has nothing to lose. The aggregate economy, on the other hand,
has lost the value that was forthcoming from my promise.
Any way you look at it, the bank or banks end up with the collateral unless there is a
mechanism which would take account of the fact that the last lenders in the amount of the default
are the rightful owners of the IOU. Even the principal is constantly deferred from repayment into
the economy to the last lenders by the passing of bank IOUs in the form of bank cheques from
one bank to another. This means that, even if there is always a deposit liability to account for the
value of the principal, the principal is always on the books of the banking system as an asset. No
bank has given value in consideration of value. They only have the claims against value.
In fact, I doubt that the above mentioned mechanism (to identify the rightful claimants or
last lenders) exists. That is the reason that I believe that the principal and collateral (and the
interest, if it is to be payed) should go to the economy as a whole rather than to the bank(s). It is
the economy that must absorb this loss, which is exactly what it does. If no mechanism is in
place to confer value back to the system on default, then the loss on default is a loss to the
economy as a whole and is not recovered.
So we have the banking system, which has given nothing in the form of value other than
bookkeeping and is in receipt of and claiming ownership of:
1. The loan as an asset, where real value is actually given by the last
lenders of value.
2. The flow of payments which accrue to pay principal and interest
charges.
3. The collateral which may be realized on default, which does not go
to the last lenders nor to the economy as a whole.
Those who may actually suffer a loss (diluted among the holders of IOUs in the
economy?) have no mechanism for recourse and are generally unaware unless their IOU (bank
cheque) is not honoured. We are left to pass our IOUs among us, generally honouring the
commitments we make to value, but it would seem that all of the value that is claimed by the
bank above is DISTINCT, PARALLEL, AND SEPARATE from the flow of the IOUs. All of these
flows and asset claims are losses to the economy under this understanding!
Is there any way that this can be understood differently, such that this state of affairs
could be in some way justified? I don’t see it. (I am reluctant to insist that this situation as true,
because the implications are mind-boggling and some kind of proof would seem to be in order. I
don’t think I’m qualified to offer that proof, but I will attempt to illustrate evidence suggesting
that this scenario is indeed accurate a little later. For example, see future references to the total
liabilities outstanding in the “National Accounts”.)
All of this value is real, however. It is paid for by the effort of all participants of the
economy who truly deliver value.
One other thing should be mentioned with respect to the effects of default.
In the above balance sheet example, the value of the loan that is shown on the balance
sheet is for the principal only. But, in actual fact, the value of the asset to the bank includes the
forthcoming interest and the asset will be valued according to a financial formula that will take
account of the full “value” of the loan as a security. In financial terms, the loan has a value
equivalent to the “net present value of future cash flows”, sometimes shortened to “net present
value” or “NPV”. This valuation takes all of the future stream of cash flows that would result
from the loan, with some discounting adjustments, and accounts for them in the present. All of
this value should show up in the aggregate value of the bank, forming part of the growth and
earnings estimates that enter into the NPV calculation, and be represented in the price of its
stock. (Other factors which will affect the perception of NPV will be discussed in the section on
the stock market.)
Something that I should make clear then, from the example, is the fact that from the point
of the onset of the loan transaction, the bank will recognize the liability of the principal in the
deposit, but the asset that will show up on its balance sheet would be, I am sure, the NPV. This
means that a value even greater than the principal has immediate positive consequences for the
bank, without any value given on its part. This value will show up in its stock price and is an
immediately available liquid source of profit by the mere exchange of stock for some other
security (IOU).
When considering the impact of a singular loan transaction, the effect is minuscule. But
taken all together, all outstanding loans are valued in the present as if the value which is
required to fulfill the obligations of the loan have already been met and as if the additional effort
which is required to pay the interest has already been done. (Liabilities and risks also go into
the mix in any stock evaluation, but the essence of this statement is valid.)
Since the loan principal is considerably less than the NPV which is in the stock price, a
default on the loan will result in a decline in “net asset value” greater than the amount of the loan
principal. The price of the stock will be adjusted downwards to reflect this “loss” and it will
generally be greater than the value of the lost principal because future income is also affected.
Banks are over-valued for two reasons then: They have given little or nothing to the
equation and they are “counting their chickens before they are hatched”, so to speak. This
extreme leverage works against them on default (i.e. “writedowns”), at least as far as their stated
equity and their stock price is concerned. We should keep in mind, however, that since they
contributed nothing, they couldn’t really lose anything. The same might not be said of the
“borrowers”, lenders of value, or the purchasers of bank stock, all of whom have actually put up
something of value.
In any case, if the collateral is not sufficient to meet the financial pressures that may be
brought to bear on the bank, they can always write another IOU, possibly in the form of a stock
issue. There’s plenty more IOUs where they came from, as far as the bank is concerned.
Many of these characteristics with respect to banks as stock market securities are shared
among all such securities. More will be said about the stock market later on.
The bank has nothing of value to offer except what you, as the “borrower”, have
promised and guaranteed. What could a bank possibly give you but “money” which is only
another promise to turn over value at some point in the future? But when does this value come?
And by what effort? Is the effort proportional to the value they wish to receive for it?
Where does the bank get all this money that it can fund virtually all of the commercial
transactions in the country? If money is in the hands of the holder as a receipt for fair value
already given, this bank must have done a lot of work in the past to have accumulated such a vast
collection of IOUs. But if “loaning money” is virtually all that banks do, where is the value they
have given that is represented by all the money they apparently have to lend? If lending is all
they do, then the value must come from the lending itself, so it must be the interest that they have
accumulated which we’re borrowing, right? (Well, not exactly.)
So what is really happening in the typical loan transaction?
What is your intention in the borrowing in the first place? You intend and promise to
deliver value to some other party, in the form of an IOU which will eventually be redeemed for
value and cancelled at some point in the future within the economic system. In short, you need
the ability to trade with your peers such that you may transfer future earnings or assets rather than
present ones (the collateral). Are you trading with the bank? Again, what is it that the bank has
to trade? What forthcoming value would its IOU be representative of? What possible value
could they give except that of the accounting function? Even if they were actually “lending you
their money”, they could only have acquired those receipts (IOUs) for value given by giving what
they have to give, which is the accounting services. That is what banks do!
Conceptually, I hope that you can see as I do, that all of the paper (IOUs) that is
changing hands is not of real value and cannot be properly considered as value given in and of
itself. Value is only truly given or received when the thing which is represented by the paper
(IOU) is transferred. Whatever that thing is, it generally came about by effort, which is where
the real value was created. Everything else is accounting.
What banks are really doing
The primary services of value that the bank has to offer is the ability to pass your IOU on
to the economy at large and the fulfillment of their responsibility to society to ensure the quality
of and delivery on the promise you make. Those are valuable services indeed, but they are ones
which we have collectively assured by the authorization of bank charters and one which we
expect as a condition of the charter. The bank passes your IOU on by “depositing” to your
account a credit which has not yet been earned but which is expected to be in due course.
Because we generally tend to honour our promises, the low probability of default allows us to
benefit collectively from the distribution of this risk across the whole economy. We are all
beneficiaries of this excellent insurance and IOU exchange system. Another way of describing
the (proper) functions of banks then, is as “flow-through” agents for the transference of IOUs
between members of society who wish to exchange value, and as managers of the potential risk
of default.
The reserve ratio
Banks have ostensibly been given charters to take deposits and fund the financial
operations of the country. They perform the functions mentioned in the discussion on money in
general, namely the accounting functions that keep our IOUs between one another straight. They
perform a clearing house function in that sense.
They have also been given the authority and responsibility by our government(s) to fund
the financial requirements of business in the economy in a way which, hopefully, serves us all.
(If it does not serve us all in an equitable fashion, then perhaps we should reconsider the value of
the current arrangement and find another which better suits the intended purpose.)
It would seem that, in fact, banks do not loan money so much as they take contracts or
promises from those who require funds- promissory notes of one form or the other. The promise
is not generally accepted as sufficient unto itself. The promissory note or other form of contract
is usually, if not always, accompanied by some form of collateral in the event of a default on the
promise. This seems reasonable since the promise is not guaranteed by the public such as in the
case of cash.
In the past at least (prior to Brian Mulroney, I believe, 1991), the government determined
the amount of credit (debt) that the general public could promise at any given time according to
their ability to deliver on the promise. This was set as a ratio of outstanding promises (in the
form of bank “loans”) to the amount of credit on account (deposits) at any given time in the
country- the reserve ratio. I believe the idea was that, if this ratio was properly set, there would
be sufficient activity guaranteed such that all would prosper by the on-going exchange and
commerce in society through the flowing dynamic equilibrium of balanced commerce.
In my opinion, levels of economic activity should basically be incidental to the will and
desire of the collective population as evidenced by their willingness to enter into commercial
transactions. (After all, if I am willing and able to deliver on my promise to you and you are
willing to accept my IOU in exchange for the value you will give to me, who else should make
the decision?)
The control and adjustment of the reserve ratio should function as a secondary regulator
in the event that the level of defaults in the economy are increasing, which might be indicative of
an decrease in the ability of people to fulfill their promised obligations. In theory, this
mechanism is purely based on the ability of members of society to make promises and keep them.
Properly utilized, the ratio would be adjusted to reflect the activity of the economy rather than the
reverse, which is that activity is dependent on the “supply” of money as determined by those who
are in control of the supply- the banking industry. This reversal is what is in place now.
More importantly, however, if it were not for the existence of interest as a charge on
outstanding IOUs, a reserve ratio would probably be virtually, if not completely, unnecessary.
This is a theoretical presumption on my part, but its basis lies in the tendency for value loss that
comes about from the monetary system, to the advantage of the financial institutions, and that
necessitates ever-increasing growth. (I will discuss this later.) I believe that, in effect, the
reserve ratio was a check valve to regulate the banking system so that the rest of us would be able
to keep pace with the constant drain. (If we can’t maintain our promises to one another, the
banking system loses its cash cow.) In my opinion, the monetary system (banking) as it now
operates is THE ultimate risk factor affecting stability and value in the over-all economy.
The very existence of the reserve ratio is (was) a powerful clue as to whether banks are
really loaning money as opposed to accepting IOUs and circulating them at interest. If they were
truly loaning their money (or yours, for that matter), there would be no need to limit the amounts
according to this ratio. They could freely lend what they had to lend in the same way that anyone
else is free to do with their money (IOUs or receipts for value given). Since this would be a
finite amount, and the prudent holder of these IOUs ( the bank, in this instance) would choose to
lend wisely, the process would be self-limiting and require no outside controlling mechanism. In
other words, the reserve ratio would be redundant. I believe that, in fact, the reserve ratio was
brought into existence in recognition of the fact that it was not necessary for banks to actually
“loan money”.
Summary impressions of banking function
The bank does not give you “cash” when they give you a “loan”, do they? Cash in the
hands of a holder represents a debt that society owes to this holder for value given. Even if they
have accumulated this kind of credit in a stash somewhere, they are not offering you this as a
loan, so they are not loaning you money. Instead, they give you a cheque book so that you may
“draw” against your account. You write cheques to those with whom you wish to exchange
value. This is an IOU as well. The one to whom you write the cheque “cashes” it by depositing it
to his account such that he may write cheques (more IOUs) in turn. You write the cheque in
recognition of fair value given. When your cheque clears, your debt to the receiver of the cheque
is theoretically cancelled and the bank has now taken on the obligations of the IOU as recorded in
the account of the one to whom you have written the cheque.
The bank does not generally recognize the value given by the depositor with cash,
however, just as in the case of their “loan” to you. They merely record the deposit and allow this
depositor to write cheques against this account as well. However, since this depositor has
deposited a cheque which is an IOU recognizing fair value given (his effort), it is his right to ask
for cash as society’s honouring of this value. That is what currency is. Even if your cheque has
cleared, the bank will show reluctance to honour the fair value given (by the depositor) with cash
and will even refuse to do so if he does not have an account with the bank. The reason for this is
simple. If he withdraws his receipt for fair value given in the form of cash, it will no longer be
on deposit with the bank.
Your IOU has entered the money supply and is now being passed on into the economy.
When you have finally given sufficient value through future effort to others, you will
deposit their cheque money IOUs in your account. From this account you will write cheques to
the bank. Thus, your value will have been given and recognized and your IOU will be cancelled.
At this point, both you and the one(s) to whom you have written cheques will have given and
received fair value in exchange and there are no outstanding IOUs between you.
But there is no point within these transactions where the bank has given value with
respect to the amount of the “loan”. Nor are they transferring “cash” as a receipt for fair value
given by some past effort of their own. They are merely passing the IOUs from one account to
another.
The “loan” to you is an increase in the “money supply” because it is an additional IOU in
the system. Your future efforts will provide the value to the aggregate economy and (may) be
recognized by the cancellation of your IOU. In theory, proper accounting of this cancellation will
show a corresponding decrease in the money supply. (A discussion of interest and its effects will
follow shortly.)
I submit, as many others have also concluded by engaging in a similar assessment
process, that the bank provides no funds nor value to the transaction with the exception of the
administrative functions which are its true mandate. The funds have been provided by your
promise to deliver value as represented by the promissory note and secured by the collateral
which you may have extended.
summary recap - money thus far
In effect, while money is a promise by the public in general to honour the collective IOUs
of us all at some time in the future, promissory notes, (including those promised to banks) are
promises of individual parties in society to honour their promises to other individuals in society,
as I’ve already said.
All promises taken in the aggregate, however, can be thought of as the very same as
currency money since it is the same collective honouring of these promises that backs all of the
promises that we otherwise call “money”. In fact, these promissory notes are money. Taken in
the aggregate, they are all quite likely to be honoured and hold the same value as any other form
of money.
The receiver of a loan is giving the “lender” the same promise as that contained within
the currency of the land- the promise that future value will be given in due course. To guarantee
his promise, he offers his collateral as value in the case of default. Fair value will be given in
due course, as is the same for all forms of money.
So, on your promise to deliver fair value in the future, the bank accepts your promise and
adds it to the total volume of other monetary promises in the economy. In its function as the
accountant and clearance house, and in accordance with its obligations as the provider of funds
(accountant) to the economic activity of the country, it accepts the promise on behalf of those
from whom fair value will be given towards your cause, those to whom you will write cheques to
be drawn on your account. This promise is then passed on to others who accept it at face value
and exchange it for value in the future. It could be said that it is not the bank which accepts your
promise, so much as it is the collective economy. In any event, the bank has your collateral as a
guarantee which is available for distribution to those who may not receive the full value of your
promise.
One might ask if the bank is offering value for service. To some extent it is, in that it is
the intermediary between those who wish to exchange values in the amount of the “loan”, but
that is more of an administrative function and hardly justifies the exorbitant cost of the service
which is represented in the interest charges.
So it seems to me, and to many others who have inspired me to give extensive thought to
this entire issue, that the bank does nothing to warrant a claim of ownership of the funds that are
created by a “borrower’s” promise, nor in fact does its service warrant the ownership of the claim
against the collateral. The promise is the money, which goes into circulation along with all of the
other promises. If the promise is broken, the collateral should belong to those who have
extended the value to the borrower and have not received fair value in return. I suggest that this
is not the bank. Since the promise has been added to the aggregate of all promises in the
economy, thus becoming a part of the money “supply”, the default should trigger the distribution
of the collateral to the aggregate- the economy as a whole.
Finally, as a control to regulate the supply of money according to the demand as
determined by the chosen activity level of the economic community, it would seem that the
reserve ratio is largely redundant, since economic activity is self-limiting according to the
willingness of participants to make promises and their intention and ability to keep them. In the
event that this process of self-regulation is somehow compromised, the reserve ratio may be a
valid mechanism. It would seem preferable to the status quo which utilizes interest rates as a
regulator and leaves the banking industry as the beneficiary of the monetary system rather than
the people for whom it was ostensibly created. In fact, it is more likely that it is the presence of
interest as a charge on IOUs which created the need for the reserve ratio as a regulator in the first
place.
What About Interest?
Why should banks earn interest rather than have interest accrue to the public? What
purpose does interest serve other than to enrich banks? Is interest necessary at all? Is the time
value of money argument valid as a justification for interest? Why does the federal government
have to borrow money at interest when they alone have the right to “print money” and therefore
to fund the operations of the country without paying interest (or collecting taxes for that matter)?
Since, in the case of a bank loan, money is not sitting there waiting for someone to use for some
other purpose in any case, but is in fact created by the promise of new value by the one who
requires it, should the “loan” not be sufficiently paid when the value of the principal has been
paid (i.e. recognized value has been transferred to all contributing parties)?
These are all very valid and interesting questions to consider now that we have thought
about the concept of money and what money really is.
If you accept the premise that banks do not loan you money, but merely accept your IOU
and place it into the stream of outstanding IOUs that we call the money supply, then it seems
difficult to justify the banks’ right to collect interest, at least not in their own name. And if not in
their name, then in whose name is it to be collected. More importantly, why is it collected at all?
The common understanding that the bank owns the money and has the right to charge for
the lending of it has been called into question by the premise that they do not own the money nor
can they fulfill the promise of future delivery of value. Why then, do they have the right to charge
interest?
Aside from the banks’ claimed right to do so, the economic argument for the value of an
interest charge on outstanding loans lies in the concept of the “time value” of money. The “time
value of money” (i.e. interest) notion comes from the idea that a favour is being conferred to a
“borrower” and that a price must be paid for this favour. Moreover, and this is the really
important part with respect to economic theory, the price is set by market forces as there is a
demand, and thus competition for, the funds which are being “lent” which, we are to presume,
are in limited “supply”.
In hand with this “limited supply” theory of money, we find the complementary idea that
money made available now is worth more than money that you have to wait for, so it’s worth it if
you have to pay a price to get it now. You could call this the “bird in the hand is worth two in
the bush” theory. Of course, this is absolutely true if money is actually in limited supply, but if
money is only an IOU, the only real limits are particular to the transaction and have to do with
the quality of the promise and the willingness of the giver of value to accept it in good faith.
With this understanding, the “money supply” operates at the personal level and there is no limit,
certainly not at the macro or societal level. Aside from abilities and intentions at the transaction
level, the relevant supply factor is the availability of paper to write the IOU on. The currency
system then, as I have mentioned, is merely an efficient social mechanism for recognizing IOUs
and distributing benefits and risks of the system.
However, notwithstanding other reasons why a bank may be limited as to the number and
amount of “loans” which may be outstanding at any given time, there is no competition for the
funds that I request when I ask for a “loan” at the bank, since the funds do not exist until I create
them with my promissory note. The bank merely offers its own promise in exchange for mine.
We do this because there is generally accepted confidence in the note of the bank and it is not
necessary that others then have confidence in mine. (In this respect, the bank’s promise
functions much like the currency of the country.) If I did not offer my note as promise, the funds
could not exist at all. I, therefore, am the one who creates the demand and also the one who
fulfills the promise, thereby justifying the supply of the funds. Market forces, in and of
themselves, do not impact my ability to make a promise, so why should there be a limit on the
promises that I can make other than my inability to fulfill them?
This ability to make a promise and keep it is the real funding. This is where the value lies.
It supports the ultimate confidence which drives the real economy, in my estimation. We all
benefit as long as we are able to meet our promises.
Interest as a monetary policy tool
Ostensibly, interest is a valuable tool in controlling the demand for money when the
economy is “too hot”, “too active”, too much of something we never really get. It controls
demand by controlling supply. It controls supply by controlling the price. Undoubtedly, if one
were to question a formally trained economist as to the rationale of this theory, he would pull out
all the stops and his vast repertoire of mathematical and theoretical models to show the complete
devastation through “inflation, over-production, over-capacity, devaluation of the dollar”, etc.
that would ensue from the suggestion that interest may not be justified. Within his argument,
however, there would be no mention of, or justification for, the fact that banks are the happy
beneficiaries of the interest and debt which is the solution to all of our economic woes.
Unfortunately, I believe that economic theory arguments for the justification of interest are
cyclic. They certainly do not have the power of nature that is suggested by the economic bibles
that are written by the money gurus that dictate policy and economic direction in society.
Believing, however, as strongly as we do in the infallibility of the theories certainly serves the
purposes of those who claim ownership of the money and the interest they charge.
One can certainly understand the potential for hyperactivity in the marketplace under a
zero interest policy. However, as I have already suggested, the activity level should be
determined by the parties to the transactions. People will limit their financial activities according
to their desires and abilities. (Of course, this does not preclude the rights of affected third parties
[including the collective] to invoke regulatory measures to limit activities that negatively impact
them in some material fashion.) In any case, the proper use of a reserve ratio mechanism,
coupled with adequate collateral ratios, income requirements, etc. as deterrents to default, should
be adequate with respect to this kind of intervention in our collective mutually agreed exchanges.
We must keep in mind that the real danger we are attempting to avoid is not over-activity per se,
but the probability of default among economic participants which may come about if they
become “over-extended”. Commonly practiced methods and due diligence in lending practice
would still be a valuable component of any monetary system, whether interest forms a part of the
mix or not.
The other major concern that seems to preoccupy the “powers that be”, and for which
interest is offered as the solution, is the ever-present “threat of inflation”. Inflation has been
defined in many ways, but what we usually are talking about is an escalation in prices such that
our purchasing power is eroding.
The Price of Tea in China
It’s interesting that the thing that we single out as being the most dire warning of
impending economic doom is the increasing demand for higher wages. This is usually taken to
be the sign that everything is “going to hell in a handbasket. People are living beyond their
means. We have to stop this madness before we all land in the poor house.” Of course, you can
imagine who the “we” is in the previous sentence. It’s certainly not the wage-earner demanding
higher pay and taking the blame for the whole mess. It couldn’t be that they are merely trying
desperately to keep up, could it? The answer should be obvious. Are your wages keeping up
with the cost of food, housing, cars, energy, or any other thing of major economic value? No,
but, no irony intended, they are keeping up with the price of tea in China.
Unfortunately, the answer to the age-old question, “What does that (my wages) have to
do with the price of tea in China?” is moot. The answer is, “Not much.” But the price of tea in
China is deemed to be quite important to our favourite measures of inflation, which is the
“consumer price index” or the “core inflation rate”, which happens to include the price of tea in
China but not the cost of energy or interest.
As a matter of interest [no pun intended], interest rates are not included in the list of
expenditures for Canadian and Alberta households [Check out Statistics Canada table “Average
Household Expenditures”, 2005]. Interest charges must be included (buried) in the various
categories. I guess the cost of borrowing has nothing to do with the fact that you can afford less
each year. Considering that, over the lifetime of a mortgage, you will pay as much or even
double the value of your house in interest alone, I can’t see how this little gem gets missed in our
obsessive accounting of the inflation figures. Incidentally, over the lifetime of the house itself, it
is entirely possible that interest has been paid as many as 5 or 6 times over and above the
principal if there have been numerous owners!
Apparently, if the price of tea in China, as measured in Canadian dollars, is not going up
too fast, we are fine. But if your wages are increasing faster than that, we are in trouble. “We
have to raise the interest rate on your mortgage. Sorry about that. Nothing personal, but
people are beginning to live beyond their means again, as if the price of tea in China was not
low enough.”
It’s interesting that whenever we have an atmosphere of ever-increasing corporate
profits, the business community, and certainly the banks and government, do not throw their
hands up in the air in frustration over the plague of rising profits and taxes. Maybe there’s a
clue in here somewhere. On the other hand, maybe it’s just me.
In any case, now that I’ve got that off my chest...
Of course rising prices are a concern for all of us. There is no disputing that. However,
the reason for concern will vary according to where you happen to be on the spectrum of income
and wealth. If all prices rose gradually in such a way that relative wealth and earnings remained
the same, there would be little cause for concern. The fact is that this is not the case. Those who
have the wherewithal and circumstances which allow them to adjust their asset values and
earnings to overcome the effects of inflation will probably do so. If we can, we will use inflation
as a form of leverage which ultimately makes us better off than we would be if there were no
inflation, financially speaking.
(This is what one is doing when one purchases real estate in a rising price environment.
The downside risk is that one must divest at a higher price before demand drops and she/he must
be able to re-invest into another gaining price momentum or they will not have really gained
relative to over-all economic conditions. In my opinion, this is a “volatility” game more than a
real economic growth strategy, much the same as our stock market system of market
participation. It is a game of winners and losers rather than a rational approach to a better
quality of life for all).
The average wage-earner cannot do this, however. Neither can those who have come
near the end of their earning years and are stuck with a fixed income.
And yet, the wisdom offered by our financial experts in response to upward price
pressures is to increase interest rates. Supposedly, the magical effect of this remedy is that
people will “borrow” less, they will spend less, less production will be required, people will
reduce prices and wage demands out of a competitive need to remain viable. In short, the idea is
to strangle the economy until it says “uncle” and everyone becomes reasonable again. Of course
the downside is that, while they are finding their reason, many will lose their homes, businesses,
livelihoods and accumulated wealth. Since they usually lose these things because they “owe the
bank all of this money” and the bank holds the assets as collateral, this wealth shifts to the hands
of our gracious wizards of economic prosperity and we are left hungry enough not to complain if
we can only find a job, and afford food and a house, no matter what the price.
But the upside is definitely worth it. We have become more efficient. We are more
competitive. (May the economic gods shine their loving rays upon us. But not too much. I don’t
want to burn.)
So, yes. Interest rates can be used as an effective tool for controlling increases in prices
by forcing people to make do with less, but it’s rather like a club is to a restless crowd, isn’t it? It
certainly doesn’t seem to be an equitable means of managing economic activity levels.
Just to rephrase, the logic of it runs like this: “The prices of things are getting too high too
fast. If we don’t rein it in, it’ll get out of hand. We can’t have this kind of instability in the
marketplace. It creates an atmosphere of uncertainty and a lack of confidence. Why don’t we
increase the cost of money? Then the average Joe won’t be able to afford to buy so many other
things because he will be spending his surplus on interest. Everything will slow down and we
can get back on track with a more manageable rate of growth...(blah..blah...blah)”. Yes, that will
certainly increase the level of confidence in the economy.
Or yet another translation: “Wage demands are getting out of hand. If we increase
interest rates, everyone will be scared into a more timid, less demanding frame of mind, not to
mention the added bonus that we will become richer through increased rates and foreclosures on
default notes and mortgages.”
Whatever you may think about the value of interest rates as an economic activity
regulator, the mechanism as it is now used is not geared to the welfare of “Joe Public”, in my
opinion. It is more of an economic whip used by the masters of financial wisdom. It serves the
few rather than the many, and as such is highly questionable aspect of public finance and
monetary policy.
One last function of interest charges in the economy must be considered. A commodity
has been made out of money by the attachment of supply/demand characteristics. Since we have
created a system which produces artificial limits to our abilities to make and keep promises, we
are led to believe that there is a justifiable price to be attached to the limited “supply” according
to the “demand” for this “commodity”. Because this artificial condition exists, we have the
situation that money is traded for its own sake, as if it had value in and of itself, rather than
functioning purely as a receipt or facsimile of value.
The result of this error in our collective perception of what money actually is, being
constantly reinforced by financial media, institutions and education, has led to currencies having
values which fluctuate according to the price of money, which is interest. Demand for a currency
will quite naturally fluctuate if the value which is attached to it fluctuates. Unfortunately, this
means that, even if we the people come to our senses and realize that the current interest rate
monetary policy does not serve us well, we must take into account the effect of interest as a value
regulator of currency because it is traded internationally. The demand for our dollar goes up or
down according to the competitiveness of our price - the interest rate relative to rates in other
countries.
Whether or not the status quo is essentially useful in facilitating trade and equitable
distribution in our own society, we must consider that the rest of the industrialized world is, not
coincidentally, invested in the same system. The fact that we trade between countries means that
the value of our IOUs are affected by the interest pricing system, artificially contrived or not.
The simple truth of the matter is, that if I can achieve a return on my IOU in another country, but
not in my own, I will trade my Canadian IOUs for foreign IOUs which pay interest.
You might say, “Aha! But who will want to buy my Canadian IOUs if I cannot earn
interest on them?” and you would be right, which is exactly the point I would like to make. Our
dollars would not be traded as if they had value in and of themselves. We could then get down to
the real business of trading those things we recognize as having real value - namely, goods and
services.
Given the world as it now stands, however, removing interest as a monetary mechanism
in this country would seem to be a tremendous obstacle to monetary reform. We have to look
closely at the probable effects of establishing an interest free (internal) model.
Firstly though, I would like to give some thought to the real value of time deferral with
respect to IOUs and then to the current state of affairs with respect to currency and interest rate
trading between countries. The discussion on time deferral is highlighted because I believe the
concepts contained within it are counter-intuitive to some degree, but the implications are of
paramount importance.
Real value of time deferral
The fact that there is a lag in time between the exchanges of real value (I get mine now,
you get yours later) should not affect the value of the exchanged goods, at least not in a negative
way. We defer the exchange of our own free will and to our mutual benefit. In fact, some of the
value is intrinsic to the deferral itself because of this mutually agreed upon added utility or
convenience. The time over which the transferral of value is deferred is thought to be of mutual
benefit, thus adding value to the exchange.
In other words, the value of time deferral is positive.
There need not be a price attached to this added value, however, because we have each
recognized the benefit as mutual and equal and have no need for further adjustment. The fact that
no price need be attached in recognition of this mutual benefit is the evidence that benefit is
mutual and equal and need not be further considered, notwithstanding the real value which is
conferred to each party. (Just for the sake of clear communication, let’s call this the
“transactional benefit” of time deferral - NO PRICE TO THE PARTIES TO EXCHANGE.)
Additional benefits accrue to the economy as a whole due to the fact that, since no price
is attached to the benefit of time deferral, no price increases are passed on in further exchanges.
There are no deficiencies to be made up by further effort on the part of the two parties. Price
stability would result as an inherent condition of dependable value over time as agreed
between parties to exchange. (Let’s call this the “(absence of) pricing benefit” of deferral -
NO PRICE TO THE ECONOMY .)
A further benefit of time deferral lies in the original purpose of IOUs, which was to defer
delivery of goods or services to a time more suitable or convenient to both parties. The practice
of passing on the IOUs from one person to another allowed further deferral and a great deal of
flexibility in the arrangements of our trade benefits and obligations. It is obvious that the one
who delays the delivery of value by offering his IOU gains the benefit of time. But the one who
accepts it also gains in that he does not have to wait until his customer has accumulated sufficient
earned capital beforehand. As long as the IOU is good and can be passed on, he may serve his
customer in the present and earn a living now rather than in the future. This represents a HUGE
positive value of time deferral that rightfully belongs to all participants in the economy and, for
the same reason as stated above with respect to pricing of the benefit, requires no price as it
naturally distributes fairly and uniformly between the parties to exchange. (We will call this the
“circulation benefit” of time deferral.)
The transfer of the benefits of time deferral
On the other hand, if “money is borrowed” at interest to finance this deferral, there IS a
price attached to it - the interest. The one receiving the benefit of the time value is not a party to
the transaction, but the accountant in the process- the bank. Thus, this added value derived from
a sensibly arrived at arrangement between the two parties has been removed from the parties by
attaching a cost to it. The unfortunate result of this cost is that it must be recognized by the
parties in advance and added to the price because the exchange now has automatically transferred
value to a third party, such that the net benefit to those who chose to exchange fair value for fair
value is less.
This is an extremely subtle yet crucial point. The two parties have agreed to exchange
something at fair value arrived at to their mutual benefit. But neither of them has produced or
agreed to produce the amount which is to go to the banker. They must add this in. However, for
the increased value each must deliver, they will receive nothing in return. (Unless, of course, you
believe that the service offered by the bank as the accountant is worth the cost.)
In the current system of IOU exchange accounting (loans, banking, debt), there is a cost
attached to time deferrals because of the fact that interest is charged, and if not charged, an
opportunity is thought to be lost (“opportunity cost”, as the economists call it). If, as a matter of
course, interest were not charged, the deferral would be properly understood as a valuable and
intrinsic component of the transaction, subject only to the agreement between the concerned
parties as to mutually and equally given value. The benefits, which are value-added gains of the
time deferral, would quite rightly accrue to the two concerned parties without the need for price
adjustment or further future commitments of value. No costs would be passed on to third parties.
This is an inherent prerequisite of stable prices and therefore of stable economies. Under this
scenario, no “growth” is required in order to meet the cost of third parties!
This cannot be overstated, in my opinion. The presence of interest as a cost added to
virtually every IOU in the economy is the driving factor that insists on maximal growth, even to
the ultimate detriment of all. (Cancer is our best analogy for unchecked growth in a natural
system. Algae growth in a pond is another. Eventually this kind of unbalanced, unchecked
growth kills the host environment.) All other social concerns and remedies will be trampled to
death by this one single factor, irrespective of any good intentions which we might have with
regard to POVERTY, PEACE, the ENVIRONMENT, the ECONOMY, or OUR FUTURE
SURVIVAL. This is true even without consideration of the intentions of those who gain from
this monetary system. The ever-increasing pace required of all members of society will ensure
that no economic energy is left available for remedies, other than of a temporary nature. All
costs of remedy will eventually outgrow our ability to provide adequate funding.
This is the cascade of logical conclusions that arise out of the above discussion:
THE VALUE OF TIME DEFERRAL IS POSITIVE, NOT NEGATIVE.
THIS VALUE OUGHT TO ACCRUE SPECIFICALLY TO THE CONCERNED PARTIES
OF THE EXCHANGE AND GENERALLY IN AN EQUITABLE MANNER TO THE TOTAL ECONOMY.
INTEREST CHARGES DISTORT AND SUBTRACT FROM THIS BENEFIT TO THE ADVANTAGE OF THE FINANCIAL FUNCTION- banking.
THE LOSS TO THE PARTICIPANTS IS UNOBSERVED DUE TO THE EFFECT OF THE TRANSFERENCE OF IOUs INTO THE AGGREGATE ECONOMY- the money supply.
EFFECTIVELY, THE PARTIES TO THE EXCHANGE ARE MADE TO PAY FOR THE BENEFIT (WHICH SHOULD RIGHTLY BE THEIRS TO ENJOY) AS IF IT WERE A COST.
THE LOSS CAN ONLY BE TEMPORARILY OFFSET BY AN INCREASE IN PRICE.
THE LOSS IS TO THE PARTIES TO THE EXCHANGE AND TO THE ECONOMY AS A WHOLE.
PURCHASING POWER TRANSFERS TO THE FINANCIAL FUNCTION- banking.
REAL VALUE IS CREATED THROUGH EFFORT IN THE COMMITMENT TO MEET THE INTEREST OBLIGATION.
THE VALUE OF THIS EFFORT DOES ENTER THE ECONOMY IN THE FORM OF ADDITIONAL ACTIVITY BUT IS LOST TO THE BORROWER.
THIS ADDITIONAL VALUE ACCRUES IN THE HANDS OF THE FINANCIAL FUNCTION.
THERE IS A COMPOUNDING EFFECT WHICH DISTRIBUTES THROUGHOUT THE ECONOMY IN AN EVER-INCREASING LOSS TO ALL WHO WOULD PROVIDE REAL VALUE IN TRADE.
THIS IS THE PRIMARY CAUSE OF THE ECONOMIC DISTORTION WE CALL “INFLATION”.
SINCE THE LOSS CAN ONLY TEMPORARILY BE MADE UP BY FURTHER INCREASES IN ACTIVITY (GROWTH) WHICH ALSO ADD TO LOSSES, WHICH MUST FURTHER BE MADE UP, THE COST OF THE FINANCIAL FUNCTION (LOST PRINCIPAL, INTEREST, COLLATERAL, TIME DEFERRAL BENEFITS, OPPORTUNITY COSTS, OWNERSHIP BENEFITS) CAN NEVER TRULY BE PAID.
THE ULTIMATE RESULT WILL BE THAT ALL VALUE WILL EVENTUALLY ACCRUE TO THE FINANCIAL FUNCTION- banking.
Monetary reform would seem to be an imperative.
From a financial/economic point of view, there are three components of loss to the
collective economy that are being captured by the banking/financial function. These costs are
somewhat additive, but there are also some overlaps. I am sure, however, that the total is greater
than any one of the three components alone. The losses are a combination of the following:
1. the benefits of time deferral
2. the claims to principal, interest, and collateral.
3. The benefits of compounding
The circulation benefits of time deferral that were previously identified as separate from
the other benefits of time deferral are at least partially intact as a benefit to the whole economy.
That is the reason that we still “borrow money”. We continue to borrow in spite of the cost of
interest, so we can be sure that the perceived value must be greater than the cost.
Most of the principal is still perceived to be intact as the values are accepted between the
parties to exchange, but there is a gradual erosion as the IOU passes along due to the other loss
factors which participants may or may not endeavor to recover through price increases.
All other benefits of this financial paradigm shift to the financial/banking function, but
because financial entities are also participants in the general economy, these financial values do
show up in the economy (i.e. banks buy things, usually more financial assets). It is more a matter
of who ends up owning and controlling things rather than the relative value of them. The real
point of concern, to me at least, is the general direction of the flow and accumulation away from
those who are the creators of true value. It would be a massive undertaking to arrive at the true
costs of this current paradigm, in particular if one were to consider the direction and purpose of
the economy as it now stands versus that which might prevail under more reasonable and
equitable conditions, but such a worthy project is possible and would serve us all immensely.
The Wisdom of Currency Trading
As it stands now, we have a system which allows the value of your IOU to fluctuate
wildly in speculative markets around the world. Is this a reasonable idea?
The prevailing wisdom considers the value of a country’s currency as representative of all
of the goods and services in the country. In fact, it is valued as if it were a security, where the
“net present value” calculation is the operative financial valuation mechanism. As with stock
market valuations, this brings all of the values of the future into the present as if all of the work
had already been done. Effectively, a country and all of its past work, its resources, and all of its
future work and value are put on the auction block every day in currency exchange transactions.
Consider this:
You and I decide upon a trade of services or goods. We set an acceptable price measured
in dollars as representative of the mutually agreed values of those services. We do not trade
services directly because we wish to defer the exchange to some time in the future, so we
exchange dollars instead. The dollars are IOUs which allow us to purchase the services at the
time most appropriate to us.
Unfortunately, the value of the dollar, which represented the value of the exchange, may
not be the same at the time of the taking of real value, the acceptance of value having been
deferred to the future. Because the value of the IOU has changed, being speculatively traded in a
worldwide market, one or both of the participants in the above transaction may not be able to
achieve the value originally agreed upon at the time of the deal. The object of your purchase is
no longer available at that price. If you were to go back to the person who you made the
agreement with, you might then be able to receive the value agreed upon, provided it was then
available, but this is not likely. Even if the object was available, the other party would be
reluctant to give it over without some other premium attached which would take into account the
increase in price of the object. The increase is real to him because he recognizes that he would
not be able to produce or replace it at the old price. (Last years volume of carrots is insufficient to
pay for last years volume of apples, even if we agreed as to the fairness of the exchange last
year.) The relative costs of production and prices have moved such that the consummation of the
agreed upon deal would no longer be perceived to be fair by the parties, but there is no recourse
for renegotiation after the fact. The parties have become price takers instead of the price makers
which it is their right to be.
fact. They have compromised an essential freedom- the freedom to exchange goods and services
at a mutually agreed upon value. This freedom lies at the heart of the concept of “free
enterprise”. Who has the right to set prices apart from the parties who have agreed to the mutual
benefit? If outside parties, having nothing to contribute to the exchange, do have the right to
affect the values after the fact, how do the transaction participants take it into account in their
agreement?
interest, the values of ALL goods and services in the country fluctuate without participation of the
parties to particular trade or exchange agreements. If rising interest rates occur in another
country due to some factor which is primarily internal to that country, the value of our IOUs,
represented by the dollar, will decrease relative to the nation which raises its interest rate. This
will occur because the commodity status of currency, and the attendant price which is set by the
interest rate, will create a greater demand for higher interest yielding securities denominated in
the currency of the other country.
This is tantamount to saying that one person’s (country’s) promise (IOU) is not as good as
the other person’s. Furthermore, this assessment is not arrived at by the two parties, but by some
remote agency that has somehow acquired sufficient wisdom to decide the value of all goods and
services in both countries. The implied wisdom of this agency is such that it can monitor the
relative values between countries at such an accurate and rapid rate that it may readjust the
assigned values with each passing second, as demonstrated by the volume and liquidity of the
currency trades. The two who are parties to a transaction must have faith that, even though they
have agreed mutually to the values they have determined at the time, the newly assessed values
as determined by this remote control system must, in fact, be the true values!(???)
Of course, if you ask an economist, he will be happy to tell you that it is just not as simple
as that. Their answer, however convoluted and stunningly complex, will be based completely on
the prevailing concept of the nature and origin of money as a commodity rather than the simple
function it was meant to serve- the function of an IOU. The value of IOUs are (or should be)
determined by those who agree to exchange, not by those third parties who claim ownership of
them and attach a price for the use of them.
We might take this last sentence as a kind of economic rule or philosophical ideal. It
certainly makes sense to me. This is the philosophical essence of the idea of “free trade”, an
ideal which is touted amongst our financial princes as being the objective of all our trade
agreements. Unfortunately, this condition of freedom and fairness does not really exist, primarily
because of all the reasons under discussion. Ironically, if not purposefully, under the banner of
the “free trade” label, we are duplicating and further entrenching the very opposite of that ideal
throughout the world.
The uncertainty of value that is inherent in the fluctuating price of the artificial
commodity which we call “money” is a completely destabilizing feature of the current monetary
system. The above situation, describing the changes in values in a previously agreed upon
transaction, could not exist if money were not treated as a commodity in the first place. Money is
an IOU, not a commodity! If money is an IOU, it will not be auctioned, because it has no value
in and of itself. Without the interest charges and the currency exchange mechanisms propping up
this mistaken function of money, a country’s value could not be auctioned either.
The Responsibility of Government as to the Value of Money
We are constantly given the impression, generally reinforced by those who stand to gain
from it, that banks have great volumes of money which is theirs to lend at interest as a privilege
of ownership. We have reasonably brought this into question.
We are also led to believe that governments have the right to create money to finance the
commerce of the country and that it is therefore also their right to delegate the responsibility in
any way they see fit. However, as the discussion so far has demonstrated, I hope, money is
created by the promise of someone to deliver value, which we call an IOU. The IOUs are in
circulation, the form of some being in currency, the rest being represented in the various paper
and contracts which we accept as facsimiles of value. Collectively, they are all money.
While I will not take issue with the right (obligation) of government to print currency, in
order to meet the demand for this form of IOU which represents outstanding obligations to
deliver value, I will take issue in principle with any claim they may make as to the ownership of
it. (While Governments may have the right to issue currency, that is not to say that they may
confiscate value or counterfeit money any more than anyone else does.) All forms of money are
representative of values which have been agreed by affected parties to commercial or trading
transactions. The printing of currency is a valuable service employed by all of us, through
government, to facilitate commercial trade and give recognition to the value of our promises.
The qualities or attributes of currency, the universal transferability and longevity of the
promise to honour value given, are the essential characteristics which underpin stability and
confidence in commercial transactions within any country. An honest and accurate accounting of
outstanding debt owed to those who have given value, the holders of money in any form, is the
crucially important responsibility of governments to achieve.
As long as individually made promises to deliver value are still prevalent in the many
forms of IOUs, it is the right and the responsibility of government to ensure that sufficient
currency exists in order to adequately represent the value which has already been given by the
holders of IOUs if such form is required in order to recognize the debt owed to them.
It goes without saying that the value which was agreed upon by both sides of any
transaction which brought about the debt as represented by the IOU should not in any way be
allowed to depreciate by any means, especially not by the methods of accounting
(banking/financial function) or distribution of currency (government). To allow this value to
depreciate is to alter the values as agreed upon as being fair by each of the parties to any
transaction, and this after the fact, where there is no recourse for renegotiation. This would be
patently unfair.
A continued practice or policy which would allow this kind of depreciation would make
for a continuing discount of any values as agreed between parties. The result would be a
subsequent erosion of confidence in the currency which represents the quality of the collective
promise to deliver the whole value at some time in the future. Thus, it is incumbent upon
governments as issuers of currency to preserve the purchasing power of those who have already
given value as represented by the currency they hold. If it is the right of any two people to
decide what value is to be given in fair exchange, then governments have no right to affect
those values. In fact, it is government’s responsibility to uphold the values. This
responsibility, if met, is the ultimate guarantee of confidence in the currency and in the aggregate
economic honour and value of a country. It is not the responsibility, nor is it the right, of external
parties to determine the value of promises to which they are not a party. Any mechanism which
allows this kind of re-evaluation after the fact is in violation of people’s essential right and
freedom to trade and to set the values of that trade. If this were repeated a hundred times, it
would not be enough if the importance of this concept were not conveyed.
The creation of money then, occurs at the time of the promise of value, and it is the
responsibility, not the privilege, of governments to those who have given value (the holders of
the IOUs called money) to provide a means of full recognition of the debt that is owed to them,
such that they may at some time cancel this debt by accepting in the future something of full
value in return for their full value given.
Thus, in principle, governments do not have a right, by delegation or otherwise, to “create
money”, “print money” or otherwise manufacture currency in any form unless and until it is
required to meet the needs of those who are holders of outstanding IOUs. This should be at the
holders request, not at the whim of the government or the central bank.
In our understanding of money as an IOU, it is not an item of purchase or sale, but a
receipt in the hands of the holder for that which has been given. Why would I purchase your
IOU? What would I purchase it with? Another IOU? Or value given? If I give value, I may
accept your IOU, but it cannot properly be said that I am “purchasing” it. The only reason for a
market in IOUs would be the case where there is a special value attached beyond the value of the
original exchange, a value which might fluctuate to one or another’s advantage. This is, in fact,
what we have done under the current paradigm. If the statement in the above paragraph (The
creation of money...etc.) is an ideal, then it is not realized in the current treatment of money as a
commodity. If there is an open market, demand, and pricing for money as a commodity, then the
supply must come from somewhere. Under such a treatment, it is not possible for money to
function as it should.
Government Services
In the situation wherein the government itself requires goods or services, yet has no value
available for immediate transfer to those offering the goods and services, they have the same
responsibility to present their IOUs as any individual would in the same circumstance. They
must also make good on the promise. They can only do this in two ways. They can offer
something of value in repayment or they can ask the public at large to make good on their
promise on their behalf. (Some might cynically reply at this point that government has nothing
of value to offer in the way of goods and services, so we are left with the latter as the inevitable
alternative.)
If they cannot deliver goods and services as payment, they can only transfer the obligation
to the public at large. In effect, they do this by writing a cheque or creating money in some other
commonly accepted form, the value of which must be given over by other members of society
when they accept it in payment. If they do not create value in some sense, which must distribute
in an equitable fashion to members of society, they have effectively reduced the value of the
currency and thus the payment to the holders of debt (money/currency) because effort must be
expended by members of society to compensate for the lack of value given by the government.
Since it is their responsibility to uphold the values of foregone transactions, they cannot
take lightly their own expenses. If they do not deliver fair value for services rendered, they are
depreciating values which have been given in good faith. Even though they have the
responsibility to supply the currency or money, it is not their money (i.e. they are not holders of
IOUs representing fair value given) and cannot be offered as a promise without the attending
intention and ability to fulfill it.
To the extent that governments do receive fair value in the services rendered in our
common good, we are all the beneficiaries and the credit given to those who offer the service
should be recognized by us all. In that sense, a government is essentially the same as any
individual or organization. It performs services and receives service in exchange. IOUs are also
exchanged and cancelled where appropriate. Provided there is a fair and agreed upon exchange
of value, we need not generally differentiate between government and any other type of economic
participant in society.
There is one outstanding difference between government and any private individual as
economic participants, however. It is that government exists to serve the people rather that the
other way around. Therefore all government transactions are to be for the benefit of the
collective whole. The government per se has no resources. It has no income. It has no rights. It
has no purpose but to serve the best interests of the people. Any government which claims those
things and denies that purpose is at odds with its own people. Any system employed by
government that does not operate in alignment with this understanding deserves careful public
scrutiny.
Our task then, and by extension our government’s task, is only to ensure that fair value is
indeed given and that there is little or no depreciation of value in outstanding agreements of
exchange which are represented collectively by the value of the currency. The question then
becomes, “Does the current monetary system function in the best possible manner in which to
deliver the fullest possible value of promises made between all member participants of our
society/country?”
The above question has been answered in part by our discovery of the real nature of
money as IOUs and the fact that money has been made into a commodity, a fact which distorts
the valuable function of money as a constant facsimile of value already given. We have seen that
the “fullest possible value of promises made” cannot be achieved if you attach the cost of
interest to the promise or allow any third party to affect the value of said promises if they
themselves are not parties to the transaction and the agreed upon values.
Value Trading Between Countries
So, we have concluded that the trading of currency as a commodity is unfair to those who
give fair value, but we are left with the fact that currency is definitely traded as part of an
integrated global economic system. We must ask ourselves, “What would be the impact of
opting out of this currency trading system? Is it even possible to do so? What can be done to
alleviate the apparent inequities of the current monetary system?”
Is there an essential difference between the trading that occurs between individuals or
organizations and that which occurs between countries?
The short answer is, “Not really.” Countries trade for the same reasons as individuals.
They trade something they have for something they don’t have. The complexity of the issue lies
again in the treatment of the IOUs which represent the values of exchange. It isn’t the number
that’s attached to the goods or services traded that is important. A country’s main concern
should be one of coming to a mutual agreement with the other party as to the fairness of the
exchange.
We don’t want their dollars, we want their goods. They don’t want our dollars either.
Exchanging our dollars for theirs achieves nothing in terms of a real exchange of values. The
respective currencies merely function as numerical measuring sticks which presumably represent
the value of the goods we wish to trade.
So, just as is the case between individuals in a country, we are concerned only with
mutual satisfaction and benefit. To that end, and again just as is the case between individuals in
a country, we wish to preserve the intended value of the exchange without dilution and undue
transference of value to third parties through the system of IOU accounting. However, as we
have already determined, this value cannot be preserved through the current system because of
the fluctuations due to the commodity treatment of currency and the competition for interest rate
returns that is an automatic consequence of this condition.
As it now stands, if one country were to eliminate interest as a feature of its economy, it is
likely that there would be no demand for their dollar. Therefore, those who seek to gain returns
in the form of interest would not be investing in that country. Investment dollars would flow out
of the country and we would have lost that potential for ourselves. That is the wisdom of the
current masters of the financial world.
But, what does that mean, exactly? If money is properly understood as an IOU rather
than a commodity, then can it properly be said that I am investing in a country if all I am offering
to the table is my IOU? The real investment is in the effort, not the recognition in the form of an
IOU that comes after the fact.
In my own country, if I “invest” in a business, I transfer my earnings, my value given, in
the form of an IOU (cash, etc.) to some enterprising individual who will buy things, thus
cancelling the IOU. The things he buys will be converted through effort into more value which
will be recognized in the country, thus adding to the total net worth and, hopefully, well-being of
all concerned.
If I hand my IOU over to someone in a foreign country, what will he do with it? He can’t
“borrow” the effort it took to earn it. The effort was here, in this country. It can’t be exported, at
least not generally speaking. To use it, he will most likely convert it into a local currency that
will be more readily accepted. But since he can’t import the effort that is embedded in this
country to his, why would anyone accept it? It seems to me that if they do accept it, they are
under the false impression that my effort previously given can be imported.
My IOU is a debt, one which my country has collectively elected to honour at some point
in the future. Eventually, my IOUs must come back here in order to be cancelled. If they remain
there instead, and are taken for value given there, they will dilute the value given within that
other country as represented by the local currency. This will happen because the local currency is
money in the hands of those who have given value, the same as our money is here. If we increase
the supply of money (my foreign IOU) without the benefit of the values that should have been
created, and which the IOUs would presumably represent, the value of all local IOUs will
decline, because the value has not been created to reflect mine.
Therefore, my IOU has no value to them unless they spend it here. To use it as if it had
such value is to diminish all values in that country.
Furthermore, as long as my IOU is in their country instead of mine, it cannot be cancelled
and the debt is still outstanding in my country.
So if I “invest” in your country and my IOU is at least temporarily accepted for value
there, it would be more accurate to say that my country is borrowing from yours and the debt will
not be paid until you purchase something here with my IOU. Whatever you are offering to the
equation is the value you are giving up front. You will only collect on this value if my IOU is
used to buy something you need in this country. For your loan to me, I will pay no returns to you
in the form of interest, but I will earn a return in your country on the value which you give me for
my IOU.
It is not my money which can ever be an investment in your country. The only things of
value that I have to offer are my goods (resources, etc.) or my services (effort). If you accept my
money instead, you are accepting my IOU. I am borrowing from you, not investing in you.
By this discussion, we are considering the discontinuance of the commodity aspects of
currency and the return of all money to its original intended purpose, which is that of IOUs, the
value of which is to be determined by the parties to exchange. At this point, we are not interested
in what “they” may think the value of our dollar is. It is an inappropriate question to consider
what the value of an IOU is unless you are party to the exchange. It has only been through the
existence of interest as a third party charge, which has created the market for IOUs as a
commodity, that we can even think about money in this fashion.
With the removal of the interest rate mechanism, the more appropriate questions now are,
“What goods or services does this country offer so that we might trade with them? What
mechanisms are required to facilitate a fair exchange as agreed between parties?” We need not
fear that they will not wish to trade at all. All we have really done is remove the market for our
dollars as a commodity. The world will still want what we have.
All raging idealism aside, in point of fact, the greatest obstacle to fair trade between
countries who are not fully engaged in the currency exchange game will come from the pressure
brought to bear by those who are so engaged. These countries, which includes Canada, are the
signatories to the Bretton-Woods Agreements which bring every such country under the umbrella
of the International Monetary Fund. This organization is responsible for the propagation of the
current monetary and economic system throughout the world, to the questionable benefit of those
who choose to participate and the threat of economic isolation to those who do not, in my humble
opinion.
In our “utopian” world however, if two countries agree to exchange goods, they will
account for the value of the exchange by exchanging IOUs between them. The value is in the
goods, not the IOUs. At the point where each country has received fair value in the form of the
agreed upon goods, the IOUs are cancelled. The specific numbers assigned to the IOUs are
irrelevant.
If the same two countries decide again at some time in the future to duplicate this
exchange, but the number values assigned to the respective currencies are different, the numbers
are still irrelevant, because they are still trading the same goods in the same amounts.
If the relative values of the goods themselves have changed, an agreement will still be
struck as to the respective values and the amounts of goods will be adjusted to reflect this. This
is between the parties to the exchange to decide. There is no good reason why this cannot be
situation specific. The value of the entire economy need not be adjusted, as the current system
now requires through the currency exchange system.
Again, in this last scenario, the numerical values stated in currency will still be
irrelevant. These numbers are temporary representatives of value (IOUs) and are cancelled when
each country has received its goods according to their agreement.
So, the problem with respect to trade between countries only comes into being if one
treats the value as being in the currency rather than in the things it represents. The status quo
again has it reversed. The current system acts as if it is the IOUs which have the value rather
than the goods themselves.
With the present system, if your dollar goes down relative to another country’s, then you
must compensate with an increase in goods, even if the two parties to the trade have agreed in
advance as to the value of the exchange in goods. This is a classic example of the “tail wagging
the dog.”
If one of these countries has an interest rate which is affecting the value of its currency as
a commodity, the other country, which does not follow this practice and participate in the
treatment of their currency as a commodity, should only be concerned that they are receiving the
goods which were agreed upon. They would be unwise to accept the IOU of a country whose
monetary policy did not preserve the value of foregone exchanges. They would instead require
that paperwork express the value of goods owed in direct terms - the quality and quantity of the
goods themselves along with all attending conditions of the contract.
So let’s state this situation in plain language.
We two countries have agreed to an exchange of goods. We exchange our respective
currencies as IOUs to record the fact.
Later, I come to you and say, “I am sorry, but I will now require more goods from you
than we had previously agreed to because the value of my dollar (IOU) has gone up.”
In the situation as it now exists, you would be obliged to comply. However, in normal
business proceedings between two honest parties who do not feel constrained by forces over
which they have no control, you might understandably respond in the following manner,
struggling to remain civil at this point, and state in no uncertain terms:
“I do not care what you think the value of your IOU is. We agreed to an exchange. I
require you to honour it. When I receive the goods we agreed to, I will burn your IOU. When
you receive the goods we agreed to, you may burn mine. The debts are cancelled. The paper
and the numbers do not contain the value. It is the goods and our agreement that contain the
value and no third party has a right to alter the terms or quality of that agreement.”
The above statement might be considered descriptive of a fundamental principle of fair
trade and business, but currency trading and interest rate charges have distorted commerce to
such an extent that parties to exchange may no longer exchange in good faith without the threat
of loss due to third party intervention via the current monetary system(s).
Before we get on with other topics which follow from everything we’ve discussed so far,
I would like to briefly touch on one more interest related topic. More will be said about this in
later segments having to do with the stock market and such.
How about the case of private lending, where I “loan” you some of my unrealized credit
(money/IOU) for a fee (interest) so that you may pursue some worthy project? How is this
different from “borrowing” from a bank?
The difference is this:
1.) If the bank is not transferring its IOU (value earned and given) to you, but accepting
yours and placing it into the aggregate stream of outstanding IOUs, this is adding to the
so-called “money supply”. This is new money in that sense. In the case of a private
lender, no new money is created because the real purchasing power (a pre-existing IOU,
cash for instance) of the lender is actually being transferred to someone else. The concept
of the so-called “money supply” is at least somewhat flawed if money is more properly
thought of as an IOU, but it is still accurate to take account of the fact that, in the case of
a bank “loan”, a new IOU is being added to the total of outstanding obligations in society.
2.) A private lender offers value earned and given. A bank does not. A private lender as
someone who has acquired credit through effort (IOUs) can be said to be transferring his
earned value given to a borrower. The bank, on the other hand, is not loaning you its
money (earned value given), but is merely passing on your promise to deliver value and is
not offering anything of value of its own to your project.
“If two parties, instead of being a bank and an individual, were an individual and
an individual, they could not inflate the circulating medium by a loan transaction, for the
simple reason that the lender could not lend what he didn’t have, as banks do... Only
commercial banks and trust companies can lend money which they manufacture by
lending it.”
Professor Irving Fisher - Yale University
(From the book “100% Money”)
I don’t believe many will argue against the fact that a private lender and a borrower have
a perfect right and freedom to trade and to set the terms, conditions, and price of the exchanged
values. Even if the price for the loan (interest) is considered to be exorbitant by some, it remains
up to them to decide.
However, if you follow through on the logic as so far presented and conclude, as I and
many others have, that there is no justification for the payment of interest to a bank, since you
yourself are the source of the funds, and further that the monetary system should operate as a
public service, the benefits of which should properly accrue to all in an equitable manner, then
“loans” should be made available interest-free through the agency of banks as administrators of
said public service and as an extension of the currency system. (What?? Free money?! How can
that work? Everyone will certainly be spending beyond their means then, wouldn’t they?)
Of course, the public system would require some assurance as to the quality of the IOU
and adequate collateral, as would a private lender. (At some point here, we will have to make a
permanent shift in terminology and discontinue the use of terms like “loan”, “borrow”, “lenders”,
etc. Nobody is actually “borrowing money” from anyone. We are all just deferring one side of a
transaction to our mutual benefit.)
If this is the case, it is unlikely that there would be a market for private lenders. Why
would you borrow from someone at interest when you can “borrow” (“supply your own funds” is
a more accurate description of the process) for free (excepting reasonable administrative costs)
from a properly functioning monetary system which provides the service and security as a
universally available benefit? (Since there would not be a market for private lending,
presumably there would not be a bond market either. Consideration of bonds and preferred
shares may be undertaken later.)
You might ask, “How may I then earn an income from my surplus assets if not by lending
at interest?” My reply would probably be along these lines: You are still free to invest in projects
by taking an equity position. This would entail a fair distribution of risk as no one would stand at
the head of the line in distribution of the collateral in the event of a business failure, thus leaving
a disproportionate burden on those who “owe money”. Risk is then proportional to equity and
the entire project is more secure because of the lack of debt. Returns are also fair and
proportional depending on the contract and equity positions of the respective equity holders.
One might also ask why someone would require funds from someone else in order to
finance their business if it is possible to merely write another IOU to the public without the cost
of interest. Indeed, the contribution of your new partner would likely entail some other service or
participation of value in the partnership, or it is likely that you would just opt for writing the new
IOU to the public.
The other factor which would play into this is the opportunity to distribute risk, as well as
capitalize on expertise, which is a primary reason for taking the equity route in finance now. Of
course, the alternative of financing at interest is currently the crucial factor in making this choice,
since interest itself is a primary factor of risk. If interest need not be considered, you are left only
with the determination of value of the partnership rather than the source of finance. As the
public’s agent in the matter of fiduciary responsibility, the bank or “lending” institution would
likely play a part in this decision-making process according to risk, collateral, equity commitment
and reserve ratio constraints(?), among other possible criteria pertinent to the public’s interest in
the project. This is a valuable function of banks now and need not change (although their
paycheques undoubtedly would, along with their relationship to the “borrower”).
A World Without Interest Payments?
In an alternative world, all “borrowing” could be free in terms of interest and based on the
ability of the person or business to fulfill their promise, as it is now but without the added burden
and risk which all of society must bear- the burden of interest and other undue costs of finance.
Checks and balances would also be part of the new monetary system, but all earned values would
accrue to those who give value without losses accumulating in favour of third uninvested parties.
Undoubtedly, since the cost of leverage would be markedly lower, the reserve ratio and
other features might be active mechanisms in the regulation of economic activity. Amortization
schedules would also undoubtedly have considerably shorter time frames and greater flexibility
according to business conditions, etc., but we wouldn’t have to lose our shirts in order to slow
things down. If growth were not a viable option, surplus revenues would be free to cancel
outstanding debt obligations, all of the revenue so directed going to principal.
Would society be better off if only the principal were repaid? Yes, would seem to be the
obvious answer to come out of our discussion thus far.
In bank lending, interest is a charge which goes to the bank as a third party to transactions
in a disproportion to their contribution. Our entire international system of economics is now
based on the questionable practice of debt money and interest (that some call usury). In fact, it
might be argued that our laws and constitutions are designed around this system which benefits
financiers and governments at the expense of the people. But this is the very reason that this
whole scheme must be re-examined. If the monetary system does not exist to serve the people, it
should be changed to do so.
Surely any solutions which are contrived to correct an economic imbalance should benefit
all members of society in an equitable manner. The fact that only a privileged minority benefit
from the present system begs the question whether it was intended to be that way from the outset.
We may need to start over.
The ramifications of the current monetary paradigm are mind-boggling. Of course, the
potential benefits of re-vamping this system are huge as well. The discussion has led us here, so
let’s discuss some major topics which are pertinent and far-reaching in terms of human economic
and social impacts:
1. Income tax
2. The stock market
3. The direction of flow
Income and Other Taxes
Why do we pay taxes anyway? It’s obvious, isn’t it? There are services which must be
provided to the general public which serve the common good. They must be paid for in some
fashion. How else could we pay for these services except by the payment of taxes?
The tax system ostensibly serves to fund government operations, and it seems that this is
actually occurring because we are receiving all of this value in public services, aren’t we? For
the moment, let’s just assume that at least the last part of that sentence is true. The question then
is: Is the tax system the only or the best way of paying for government services?
Government requires a means of recognizing value given in the service of the common
good. But why do they need our IOUs (receipts for effort and value given) in the form of taxes to
pay for them?
At the risk of seeming completely boring and repetitive, I must impress upon the reader
that we have a new understanding of money.
My money is credit which is recognized as value given. I keep it in accounts of one kind
or another or in cash. Whatever form it is in, it represents a debt owed to me, one that will be
cancelled when I purchase something of value. Until such time as I do “trade in” the public
version of an IOU for something of value, this debt is outstanding. The value I have given has
been created. That’s why I have the receipt. I just haven’t been paid in value yet. That’s why
the receipt is an IOU that we call money.
All currency and credits on account are IOUs owed to the holder. The government issues
currency and charters banks to keep account of these IOUs. The total of all of these credits is
what we may term as the “money supply”- it would be more accurate to call this the “money
service”, since that is what is provided by this system of IOUs - from which we all benefit. We
use this mechanism to facilitate our livelihood.
Because we all have created the value represented by our money (IOUs), the value exists
in the country and adds to the total economic worth of the country. This is the idea behind such
measures as the “gross domestic product” and is the basis for the (inappropriate?) valuation of
our dollar.
As with individuals, if the government provides or receives a service, then it seems
reasonable that it should also have a means of accounting or recognizing the value given. ( i.e.
They need a form of IOU to account for value transfers, individually or otherwise). We are
currently moving towards a mix of “user fees” for specific services and general taxation to cover
general expenses, but for the sake of argument, let’s just consider all services as specific. This is
similar to a contractor or service provider in the private sector in its relationship to an individual.
But the similarity ends when you consider for whom the credit is being given. The
government may have created value, but who is owed the payment for services rendered? The
government works for the people. An IOU owed to them is an IOU owed to me (proportionally,
and everyone else generally). If an IOU that is owed to them is owed to me, why do I need to
transfer my earnings (IOUs due to me) to them?
The people that work for government must be paid, the same as anyone who delivers
value. This is recognized by an IOU to these people from the government in our name. They
exchange the IOUs for value in the community. At that point, they have been paid. Now the
government says that they must be paid in turn. This means that they wish us to pay them, in our
IOUs which represent the value we have given to others, so that they may cover the costs of the
IOUs they have written to those who work for them in our names.
But why?
Those people have already been paid in the same way that we are all paid - by the
exchange of the IOUs that they hold (as credit for value given) for something of value in return.
As long as we honour the cheques government writes in payment of services rendered on our
collective behalf, no other form of payment is necessary. Isn’t our government’s cheque at least
as good as a bank’s? They both are given value by the same substance - the collective will and
ability to honour the promises we make to one another. WE give value to their money, their
money does not give value to us. Banks issue money (debt) on the same principle available to
governments to do. Why do we need the intermediate step? And why do we need to pay interest
for a service governments are obliged and perfectly able to provide without such charges?
If I give my IOU to the government to “pay” for the services that have been rendered by
those who work for government, who would they return them to for cancellation? The work has
been paid for in the community already when the government IOU is accepted and value is given
to the worker/provider. There is no need to cover it any further.
Any IOUs for value given that are in the hands of government are IOUs that are held in
the public’s name. In other words, they are owed to the public. What is the point of charging the
public for that which is owed to them? What point is there in writing cheques to ourselves?
The IOUs of our government are completely backed by the willing and able people of the
country who create value to everyone’s benefit. If they need to purchase value from anyone in
our name, why don’t they just do what they alone have the right and responsibility to do - why
don’t they just write IOUs (publicly approved) to those who provide service? We will all honour
these IOUs because it is in our collective benefit to do so. Provided that we have adequate
controls with respect to appropriate spending, there is no need to come to the people and ask for
taxes to support government needs. If we agree that something needs to be done, we authorize
government to do it. Write the cheque. We will cover it. That is what we do anyway!
If you wish evidence that we have been doing this all along, consider the fact that we built
our national debt by running deficits year after year until we finally reached our current level of
over one trillion dollars in government liabilities. Yet I am sure there are no unpaid providers
waiting for us to finally have enough money to pay them, are there? If that is the case, they will
certainly starve before they are paid.
Consolidated federal, provincial, territorial, general and local governments,
financial assets and liabilities (2000-2004, Statistics Canada)
($Millions) 2000 2004
Financial assets 289,269 358,833
Liabilities 1,121,956 1,157,194
Net debt 832,687 798,361
We are to presume that the “financial assets” shown are the amounts that are not owed,
but the list of these financial assets is made up of cash on hand, receivables, advances, securities
and sundry. If money is an IOU and not a commodity, then all of these asset categories are IOUs
held in the name of the people.
But who are the liabilities owed to?
We’ll address that question later, but for now there is a point to be made with respect to
the trillion dollar plus liability. (Incidentally, that number represents over $35,000 for every
man, woman, and child in the country. This is work we have not yet done. It does not include
interest charges that will be required in the earning of it. This also represents just over 10% of
all outstanding financial liabilities in the country - over $9 trillion in 2005, that’s
$9,000,000,000,000. [Ref: Stats. Can., National Accounts] - a claim against future earnings
representing $275,000 for every man, woman, and child currently living in Canada.
Alternatively, if there are an average of 3.5 people per family unit, this represents $900,000 per
family unit!!) Presumably, we owe all of this money to someone who has not yet been paid. Yet,
with respect to the government liability at least, who has offered value whose IOUs are not
accepted in the community? Is there anyone out there who has been in receipt of a government
IOU who has not been able to trade that IOU for value in the community? If the answer is no,
then they all have been paid! What more must be done for them?
In fact, it isn’t those who have given service to government or for government in our
name that have not been paid, but those who now claim that “money” is owed to them for
something they claim to have provided which has not been provided in the community.
“And what would that be?” you ask. “Why, the money itself, of course!” says our friend
the banker.
As in the case with banking, we seem to have a parallel accounting of the values that
represent the exchange of values between government and those who provide service. The
values have been provided by the providers who in turn have been able to exchange their
government IOUs for value, and yet we have a debt accumulating which can only represent our
debt to ourselves. Neither banks nor governments can provide the effort or value that is required
to satisfy the value owed to providers. They can only account for them in some way. Only the
community can provide the required effort and value and they have already done so.
(As a further caveat on government taxes, if there is justification for tax, surely it is only
at the level at which service may actually be received by the public, which is generally at the
local level.)
Notwithstanding the very real possibility that the above discussion is completely accurate,
and that taxes are unnecessary, we certainly are paying a lot of taxes, aren’t we? Where is all of
this value going? Who are the beneficiaries of the cash flows? The rightful values that are owed
to those who give value are given at the point that the government’s IOU is exchanged for value,
so where are the IOUs that we write in the form of taxes actually going? Who is to receive the
vast amount that is shown as a liability on the government balance sheet? (All of the major
countries/economies of the world are in the same condition to a greater or lesser degree. If they
owed the money to one another, why wouldn’t they just offset one loan against another and
cancel loans amongst themselves? The answer is: because they don’t owe the money to each
other, but to someone else. The question is: to whom, if not each other, do they owe this
money?)
In a very real sense, governments who collect taxes operate in much the same fashion as
banks. They circulate IOUs. They claim that they give value and ask to be paid for it, when all
of the value is given in the exchanges between the members of society. They are more properly
thought of as agents in service to the people, just as banks are. In fact, banks are meant to serve
as financial extensions of government through the charters we authorize. (The current situation
is that governments operate more in the service of banks than the other way around.)
Unfortunately, the result of our current government tax system is the same as the result
we get with the banking system - very little benefit for a very big cost and duplication of
payment. Think of all of the bureaucrats, lawyers, judges, accountants, consultants, lawmakers,
service fees, licences, permits, departments, branches, and on and on and on..... that we
are paying for in our own effort and value given in order to satisfy a cost that has already been
met!
So it seems that, not only are taxes extremely inefficient as a means of covering
government costs, they are completely unnecessary. As long as we honour the IOUs that our
government offers in recognition of value given, the debt has been paid as well as it can be.
Everything else is just complication and waste.
However, there is a purpose served in all of this inefficiency. As with the banking and
financial functions, it is not a question of whether a purpose is served, but only whose purpose is
served.
Governments and banks - Who are they working for?
We are constantly under the gun with respect to our “tax obligations”. All of us are under
the impression that our taxes are required to fund the business of government, but as the above
argument indicates, the required services are paid for when the providers cash the cheques that
governments issue in our names. In the service of these tax obligations, we provide value well
above the amount we keep for ourselves. This money does not appear to be going to the
providers of value, but it is certainly going somewhere.
I suggest that a great deal of this value is going to the huge bureaucracy that is responsible
for managing the unnecessary tax system. The rest of it is going to the people who claim they
own the money - the banking and financial community.
If taxes are unnecessary, why do governments borrow money? In particular, why do they
pay interest? The government accounts operate the same as those of individuals. The IOUs are
merely passing through the banks accounting machinery. No money is being loaned. It is all
accounting.
Do the people who run our government finances understand this? If not, why not? How
could they not? Maybe everything we’ve discussed is just plain wrong! If so, please show me
where we’ve gone wrong in our little analysis.
If we are right up to this point, however, then it would seem that our governments are not
working in our best interests. It would also seem that banks have acquired a privileged position
in society which transfers the majority of all created value into their coffers. How did they
achieve this feat? Was it by accident or by design?
Regardless of what the answers are to the above questions, we must now give serious
thought to a solution to this problem - and it definitely is a problem. The $9+ trillion dollar
liability mentioned above is waiting to be honoured by someone. This amount is 2 times the
value of all physical assets in the country, including land, homes, equipment, etc. If all of
these physical assets represent all of the work we have cumulatively done thus far in our
collective financial history, then this number represents the work we have not yet done. It
would seem we have a lot of work left to do.
We require income in order to purchase the things we are fond of: food, shelter, warmth,
and maybe the odd beer or two. But why isn’t it possible for everyone to have these bare
necessities without working every day of our lives to provide them? Surely we can organize our
affairs such that only a minimal amount of daily effort would be required to meet these needs.
This is especially true if you consider the incredible technologies we have developed to save
ourselves time in the provision of these things.
But all of our time saving devices and methods have not brought us much closer to the
easy life after all, have they? We fork over a tremendous amount of our earned credit in the form
of taxes and interest - the twin false gods of commerce and trade. To calculate the portion of our
lives that are given to this needless money pit would be a huge undertaking, but I’m willing to
take a guess that possibly up to 90% of everything we do in the commerce of daily living is going
to serve these false gods. So demanding are these gods that we are forced to grow our economies
at an ever-increasing pace in order to satisfy them. (This is where our technical efficiency is
going.)
But they will never be satisfied. It is their very nature to consume that which feeds them
until there is nothing left to feed them. Eventually, the only alternative left to this kind of
consumption is to seek other food sources.
The other sources have been found, but they also have their limits. They exist in the
“undeveloped” and “underdeveloped” countries of the world. The methods by which these new
sources of economic food will eventually be exploited will be the same as those that have served
so well in the past. We are quite familiar with these methods by now: interest, taxes, currency -
and then of course there is the stock market.
The Stock Market
The stock market is thought to be the institution which offers each of us the opportunity
to participate in the wealth of the country. Unfortunately, this is only true for some of us - those
who are fortunate enough to be in the position of having acquired surplus credit such that it is
possible to “invest” in the productivity of the nation.
But what do we mean by “investing”, exactly? And why do we need a “stock market” to
do it? What is “stock”? How are our “investor” credits utilized in such a way as to make us
better off?
The idea that the whole is greater than the sum of its parts is exemplified in the concept
of value-added commerce, and it justifies, quite rightly I think, the notion of profit as an
objective of business. If a business is adept at putting together all of the elements of an
enterprise in such a way as to deliver superior value to its customers, then it is right that they
should receive as compensation the value-added increment that comes out of the original mix.
This is the whole idea behind business and profit. It makes perfect sense, and I certainly do not
begrudge those who create value by this means. Although it may certainly be open to question, I
personally believe that profit generating businesses are valuable contributors to society, in
particular if their product or service fills a real need.
In any business, there are various inputs which are required in the delivery of a valueadded
service or product. Generally, these are equipment and other physical assets, raw materials,
and labour (human effort). If these things are present, a business has all of the essential elements
which will allow it to produce services and/or products which will be of use to the public market.
You will notice that I did not include “money” as a necessary requirement. Any
businessman worth his salt will quit reading at this point because he knows that “you need
money to make money”. Actually though, you don’t need money to make money (unless you’re
a bank or a lender), but you need the things which money (IOU for value given) buys in order to
accumulate surplus credit. If your objective is the same as that of most businesses, you will turn
this surplus back into the purchase of more assets which will generate yet more surplus credit.
We call this business success and economic growth.
The inputs to business success will generally be found on the profit and loss statement,
revenue and expenditures, income statement or otherwise named financial statement. It will list
all of the income earned by the business as well as all of the costs of doing business. Hopefully,
it will also show a net earning which represents the objective of its existence - profit.
Example income statement:
Revenue $1,000
Cost of goods sold 250
Gross profit 750
Expenses
Wages and salaries 200
Utilities 25
Rent 100
Depreciation 100
Interest 100
Sundry 25
Subtotal 200
Income before taxes 550
Taxes 100
Net income 450
A snapshot of the financial status of the business is usually found in the balance sheet.
This statement gives a list of all tangible and intangible assets owned by the company. The
statement also includes a list of all liabilities which must be set against the assets in determining
the real value of the business. The difference between the two is commonly referred to as the net
worth of the enterprise.
Example balance sheet: Assets
Plant and equipment $3,000
Receivables 300
Cash 100
Intangibles (goodwill?) 0
Rent paid in advance 50
$3,350
Liabilities
Bank loan 2,000
Payables 200
2,200
--------
Net (retained earnings) $1,150
Assets arrive on the balance sheet by the original funding which seeded the business and
by the earnings delivered by the effort of the owners, their staff, and the suppliers in the operation
of the business. Money is usually a part of this mix, but it is certainly not all of it. Most
businesses cannot get off the ground until sufficient equipment is acquired which facilitates
operations. Money is a necessity on the balance sheet merely as an intermediate asset which
facilitates real exchange. As such it is often referred to as (part of) operating capital.
Liabilities generally arrive on the balance sheet by “borrowing” from a bank or from a
private lender, or through debts accumulated in trade with suppliers to the business operations.
A well-managed business will have considerably less debt than assets and will ensure that the
cash flow is always positive by making sure that revenue is coming in faster than expenses and
debt servicing are going out.
If you look at the fictional little business above, what information is useful to you if you
are considering the purchase of shares in the enterprise? There are different ways of looking at
this, depending on the intent of the purchaser. Are you looking for a business that you want to
work in? Would you then be a prospective partner? If so, you would probably be more
interested in the value of the equipment and assets as well as the people who work in the
business. You are more concerned with these things than the demonstrated earnings that appear
on the income statement because you believe that your input will make a real difference and the
income will change accordingly.
If, on the other hand, you wish to buy a share of the business as a going concern, without
the intention of personal input to the operating of the business, you might be more inclined to
focus on the earnings than the balance sheet.
Of course, most investors will look closely at any information that is available before
making a decision, but the comparison I have made between the two choice criteria serves to
differentiate between those that are potential hands-on operators of businesses as opposed to
those who are merely investors. The first group would describe the average entrepreneur or
small business operator. The latter group would describe those who might purchase stock on the
market of publicly traded companies. (For the purposes of this discussion, we will consider a
small business to be any private concern that is not publicly traded on the stock market.)
The first group wants to know what they are buying and if they can affect the potential of
the business in some positive way by their own input, while the second group wants to know if
the business will continue to deliver profit in the future, possibly with the prospect of potential
growth.
The larger the business, the more likely that a potential share purchaser would purchase
from the perspective of the latter reason, i.e. for earnings as demonstrated by past performance.
This describes most businesses in the stock market. They are all large enough to be broadly held
and therefore less likely to be affected by the input of any one individual who may purchase its
stock. This factor is important in the way that the stock is priced because it tends to render all
public stock as rather generic. Investors will tend to seek the companies that deliver the best
returns for their investment irrespective of almost all other factors.
The corporate constitution which puts maximal emphasis on the value of shares rather
than on any other value criteria further serves to homogenize the selection of available companies
with whom one might participate on a financial basis. Because of the very large cross-section of
personalities and individual differences between shareholders, only this criterium remains at the
top of all possible motivations, rendering large corporations as money machines that are managed
by very well-paid executives whose only real mandate, by most corporate constitutions, is to
deliver maximal profit to shareholders above any other social concern.
These factors play well into the thriving institution that we call the stock market because
they create a very active, liquid exchange medium whose primary motivational factor is price.
All of these things make for a brisk competition for the best stocks based on future expectations
of value. The greater the competition for this limited supply of income generators, the higher the
price paid for the right to claim future cash flows. The result is that a purchaser of publicly
traded stock is not paying for assets because he knows he can earn a living with them, as in the
case of the small business owner, but is buying something which has not yet been created. He is
paying for a probable future as if it were now present. This is the idea behind the concept known
as the “net present value of discounted future cash flows” (see previous description).
The “net present value”, or NPV, calculation is the essence of stock market valuations.
While each individual investor may not consciously evaluate a stock on this basis, the stock price
is generally considered to be a result of a process that comes out of this understanding.
The other factors which go into the price are not often talked about in these terms, but I
believe them to be at least as valid conceptually as in any other valuation process, such as that
which is associated with commodities pricing - the effect of supply and demand.
Supply and Demand Factors in Stock Pricing
The effect of hyper-liquidity such as we now have in our stock markets is that prices will
escalate to a point where they will all yield an average return that is very similar to the prevalent
lending rate. This is because the price will be bid up (or down) to a point where the return will
match the next best investment opportunity. After all, why should you sell your business interest
at a discount to any other providing a similar return? Alternatively, why should you pay more for
the stock of one company than another if the earnings are the same?
The one qualifier which typically leads to higher stock market returns is the growth
potential that must be present in a company if its shareholders are to do well. Growth has
become an absolute requirement for any publicly traded company. It cannot afford to remain
constant (stagnant) in its earnings because the competition for its stock will generally push the
price to a level that eventually makes anticipated returns from operating cash flows inadequate to
warrant the investment. As prices adjust and yield returns closer to the prevailing lending rates,
the incentive to invest as an equity holder disappears because of increased risk relative to the
lenders who hold a superior security in the event of default.
As an example, imagine a stock which is now available at a price that will return 25%
over the next few years provided the newly discovered prospects of the company should pan out.
Since most companies are currently yielding around 10% (for instance), the price of the stock
will tend to move upwards by about 2.5 times such that it matches the next best opportunity (i.e.
the 10% yield). So a $100 million company earning $10 million per year will effectively be
worth $250 million if their earnings are expected to increase by 2.5 times - i.e. stock price will
move roughly proportionally to earnings expectations to settle near the average returns of other
available investments.
For publicly traded companies, as long as there are other companies out there who offer
greater growth potential, no company can “rest on its laurels”. If stock price is the only choice
criterium, finding new reasons for increasing stock prices becomes the only motivation of
company management, thus leading to the prevalent short term focus of publicly traded
companies.
As another example of how prices behave in stock markets, let’s imagine that we have
just issued stock in our above business (referring to example statements above). Let us also
imagine that the scale of the numbers is about a million times greater. That means that this
company will return about 45%, or $450 million, on revenues of about $1 billion. What is that
company worth to you, especially considering that most others available are returning between
far less than 1% (growth stocks) and 5 or 6% (blue chip) on revenue. If this new issue is for a
company that plans on growing (likely, since companies usually issue stock in order to raise
capital), you can expect to pay a price which would be much closer to the high end of the range
(i.e. less than 1% returns) due to the high expectation of growth.
If you paid the price that is demanded by a generic market, as above, at the 1% return
level (price/earnings ratio of 200) you would pay $90 billion for a company with assets worth
$3.3 billion. Of course, the new cash would now be on the balance sheet, but the earnings from
this new cash are yet to be proven. This requires quite a leap of faith on your part, I would say.
At this point the small business owner is shaking his head and asking, “What are they thinking?
Why would you pay full price for something that does not yet exist and may not ever exist?”
Those that buy this stock are saying, “I don’t care if it exists or not. I only care that others think
it will exist and are willing to pay more for it than I have paid.”
Typically, small businesses will have between 2 and 5 year payback period as compared
to large publicly traded companies which will trade much higher than that (20 times earnings up
to 200 times earnings, and sometimes more). The reason has to do with the above discussion.
Small business purchasers are more likely to pay for asset bases and current earnings than future
potential. If the future looks bright to them, it will be because of the effort and know-how they
will contribute. Why should they pay someone else for the value they themselves are adding?
small business owner publicly traded company
1. lower price of stock relative to earnings higher price/earnings ratio
2. less access to equity capital better access to equity and debt financing
3. higher risk if debt financed lower risk due to finance choices
small business owner publicly traded company
4. no comparative tax advantage to investors RSP tax advantage up front, gains protected until removal from RSP
5. locally invested concerns often multi-national in scope
6. small number of partners/investors potentially infinite splitting of share interest
7. little choice re: entry and exit prices liquid market provides ample exit/entry choices
8. no secondary market for equity or debt liquid secondary market for equity or debt
9. all capital traded is material to business operations secondary market trading capital is not material to business
operations
The above table lists some essential differences between small businesses and publicly
traded companies from the perspective of a potential purchaser. The first item on the list, the
price/earnings ratio, is indicative of the advantage/disadvantage given by the other items on the
list. These remaining items explain the advantage that publicly traded companies have over
small businesses with respect to investor preference, and the resultant tendency for capital to
flow away from local enterprises and economies towards large, centrally controlled financial
structures and investments that have questionable value to the community in which it is earned.
A prospective buyer of a small business will find that he is quite limited as to access to
capital. Equity participation by interested investors will generally require that a significant
degree of control will be transferred to investors. Investors are more likely to be partners. The
other option for small business buyers would be to seek out those that they know who may be
interested in the venture strictly from an investment point of view. These people will require
higher than average returns on their investment, however, due to the other disadvantages shown
on the list. For the small business investor, all of these criteria suggest greater risk and
therefore justify a greater potential reward.
Because of the relatively lesser access to equity capital and the attendant higher cost of
this type of financing to smaller enterprises, small business owners often will seek conventional
debt financing (i.e. “borrow” from a bank). The constraint of poor capital access will affect the
cost of debt, since the “lending” institution will be concerned about the additional risk here as
well. Getting out of a cash-flow problem will be much more difficult for small businesses and
subsequent financing will be even harder to acquire.
Public companies, on the other hand, can either issue more stock at whatever level is
required to meet the immediate need, or they may issue bonds or preferred shares which will
yield higher returns in consideration of the greater risk involved. In most cases, it is not a matter
of whether additional financing will be available, but only how much paper must be issued to
cover the need.
Our current economic structure favours publicly traded companies in other ways as well.
In particular, small businesses are not generally RSP eligible investments. This means that
average Joe Investor has an immediate “return” on his investment if he elects to invest on the
stock market and subsequent returns will accumulate tax-free within the RSP account. Small
business investments are not generally tax deductible and taxes must be paid on earnings in the
year they are earned. Of course, this one advantage alone is sufficient to prejudice investment
funds away from small, generally locally owned and operated businesses towards large, nonlocal
multinational corporations traded on the stock market.
One other major difference between small businesses and large stock-traded companies is
that getting into or out of the former is considerably more difficult than for the case of the latter.
Owners are generally in it for “the long haul”. Selling or liquidating a small business is often a
multi-year process and is not considered lightly. Re-entry into the business after having exited
would be a highly unusual situation. Therefore, there is only one entry price and one exit
price, both of which are often accompanied by compromise on the part of the principal.
Stock-traded companies, on the other hand, may be entered and exited several times
within the same business day, if one so wishes. This is an advantage few other investment
vehicles offer and it is one which favours both buyers and sellers because of the tremendous
flexibility in choice points. This factor is chief among others which justify the higher price paid
for the business. Wrong choices are easily corrected and the cost of those choices are generally
minimal as compared to wrong choices in a small business. Whether one is invested in debt or
equity of a stock-traded company, there is a readily available market for the paper by simply
making a phone call or utilizing any electronic trading medium.
What we have been discussing thus far with respect to the comparative differences
between the two business types or sizes, are the factors which affect price of business shares that
are supply and demand dependent. While the valuation process is essentially set by the NPV
calculation, the perception of what that value may be is a “moving target”, so to speak, and refers
to an estimate of future value as determined by earnings and growth estimates. What one may
actually pay for such value is in turn dependent on how badly the investment is wanted - the
“demand”, and how much is available - the “supply”. Demand waxes and wanes with the
earnings and growth estimates of the company as compared to the opportunities offered by
competing investment vehicles. Supply is a function of the availability of the stock.
“Investment capital” or isolated circulating deposits?
The last item on the list bears particular examination. All capital and funds in small
businesses are integral to the operations of the business. The money paid for a share of such a
business will generally go directly to the purchase of useable assets. That is most often the
reason the owner sought the funding in the first place, unless the sale of shares forms some part
of his/her exit strategy.
Stock-traded companies do not have access to funds that are used to purchase stock in
their companies except by the issuance of a new security. Most investors are not buying new
issues, however. They usually purchase from and sell into the secondary market. In other words,
they exchange shares with one another in a constantly shifting ownership parade. The money
moves from one account to another and another and another in a steady cycle. While some of
this “investment” flow may actually end up as useable assets on the balance sheet of a company
through a specific sale of new issues, this is not generally the case. The perceived value of the
company will be reflected in the price of the stock, but the price of the stock cannot be converted
into useable cash unless the company sells its own stock - which is a new issue.
Effectively, what this means is that the vast majority of funds invested in RSPs are not
actually invested in the economy by direct participation in stock-traded companies. The
operating and capital budget funds of these companies may only be subsidized to the extent that a
cash influx may come from new issues of equity (stock) or debt (bonds or loans). Years may pass
between such issues but the stock price of the company will fluctuate virtually with each trade of
its stock.
One effect of this is that, since the supply of available stock is fixed at any given point in
time, such that the relatively larger influx of RSP funds that comes available during the RSP
season has to compete for the “value” stock on the market. The price of the stock at this time
cannot be said to be purely an effect of the earnings potential of the companies, but instead more
of an effect of the limited supply of available stock for sale. This may be offset by further stock
issues by companies wishing to take advantage of this new capital looking for a home; however,
the fact remains that the valuations of these companies in terms of total market capitalization
(stock price x outstanding shares issued) will tend to be inflated. It is rare that a publicly traded
company is available at the value of its net assets or “book value” (the point closer to which
small businesses may tend to be valued even as going concerns) unless it is seen to be failing.
So, what’s the point to be made by all this?
If we’re not actually investing in a company when we purchase stock, what is happening
to our credit? As we’ve just determined, it is not generally available for personal usage or
company usage, so what purpose can it serve? If it can’t be spent, it is virtually out of
circulation. If it’s out of circulation, then the debt that society owes the holder of this credit as an
IOU cannot be cancelled by the purchase of something of value - the object of the earning of such
credit in the first place. While it is true that we are exchanging credit amongst ourselves when
we buy and sell stocks, we are not actually creating value through the exchange, which is the
objective of real trade within society. There is no effort created toward the mutual benefit of
parties to the exchange.
The credit is, however, held on account somewhere - as a deposit, if it is not in stock.
Ostensibly, the original idea behind registered retirement savings plans was that they
would provide capital to the companies that required it and so contribute to the economy and to
the financial betterment of us all. But, as I’ve just explained, the companies do not generally
have access to this capital and we are not investing in the creation of value by effort amongst
ourselves.
The fact that this money is not available for use by persons or commercial entities which
create value means that it must be replaced by some other source of funds if credit is required.
The net result is that more money will be “borrowed” to fill the gap. Without the attendant
creation of value to accompany the new money that banks must issue by their standard means,
we suffer yet further erosion of our individual wealth to the advantage of the financial function -
banking.
This is the very opposite of the intended effect or promise made by those who invent such
programs on the premise (promise?)of over-all economic betterment. Again, however, the
scheme works very well. It is only a question of for whom it works.
Perhaps you’ve noted the similarity between the parallel system of accounting that
defines the banking system and government accounts and the parallel system that seems to also
exist with respect to the stock market - namely, the operating accounts of the businesses on the
stock market and the counterpart stockholders’ accounts in the public stock market of which a
company may be a part. The values that are traded and earned by a company are not directly
accessible by shareholders. They may buy stock or sell stock. They usually do this among
themselves in the secondary market.
As part owners of stock traded companies, the only real access shareholders have to
company cash flows is through dividend distributions, which are usually a small fraction of cash
flow and are generally comparable to that of debt instruments.
While losses and gains are possible through the trading of stock, little or none of this
trading is material to the operations of the company unless the company is buying or selling its
own stock or issuing new debt.
(At this point, I would encourage you to read Appendix 1 with the attending notes as
background information to the following.)
As you can see from the above table, most of our investments are in financial instruments
such as stocks and bonds. With the exception of our real estate holdings, which are generally
held as living shelters rather than as investments, we have most of our retirement savings locked
up in stock market based paper. The companies underlying these securities are controlled by
financial and corporate interests. Because we as investors do not have access to the assets or cash
flow of these businesses, the only security offered is in the paper.
For the reasons previously mentioned, I believe that these investments tend to be quite
inflated in value. I believe that real estate is also highly subject to over valuation because of the
general instability of the financial system and the exaggerated movement of the workforce due to
an artificial(?) stimulation of non-local economic activity.
Of the 50% of personal assets which include real estate, half of all homes are under some
mortgage obligation, which means that financial interests also control a large portion of personal
non-financial assets. In total, I would estimate that about 45% of all personal assets are
controlled by financial interests and are therefore at risk of loss of substantial equity in any
market reversals. (Note: As I am now editing this document in the “fall” of 2008, having begun
writing in 2006, we are currently going through a financial melt-down that has yet to run its
course. I may have something pertinent to say about this later, depending on how it finally plays
itself out. Unfortunately, we usually only see these things clearly in retrospect.)
In a stable, locally sustainable economy, major price movements in either direction would
be quite rare, if in fact they would exist at all. Volatility in any market is the result of sudden and
unforeseen circumstances that alter perceived value and create major fluctuations in supply and
demand. In my opinion, in a naturally evolving community with normal growth and distribution
of resources, such fluctuations would be quite minimal because outside influence by massive
financial and industrial decision-makers (who do not operate in the interests of local
communities) would hold far less sway. If needs are being met from local activity, there is less
incentive to disrupt locally sustainable economic and cultural life.
(from “the Wealth of Canadians,…”StatsCan research paper, 2005, see appendix 1, table 1c and notes)
Distribution of Personal Assets 1999 2005
Pension and Financial Assets 41.3% 39.4%
Non-financial (real estate+) 48.5% 50.1%
Business 10.0% 10.5%
As you can see, local small businesses have a huge challenge in competing with large
public corporations for capital. Most financing will be of the bank loan kind, in large part
because otherwise available equity funds have been swallowed up by a prejudicial investment
system which absorbs purchasing power from local areas and places it in a kind of financial
limbo called registered savings plans. Within these plans, it can hardly be said that the money
has been “invested”. It seems more accurate to state that our investment capital (savings) has
been taken out of circulation where it could do us the most good and been replaced with debt
financing by financial institutions. In large part, we have all become speculators in the stock
market system rather than investors in ourselves and our communities.
(Note: All of this applies equally to any stock investment outside of RSPs as well, with the
exception of the tax “advantages” of RSP plans. The same may be said about any derivatives,
currency or commodities markets. They all have the effect of removing purchasing power from
local areas and from the general economic flow of the country, thus requiring replacement by
more debt based financing.)
It is certain that there will be those who win and those who lose in this institutionalized
gambling casino, but the more subtle effects are the most far-reaching in their impact on our lives
and our society.
The geographically remote aspects of this system make for further social erosion by
removing investors from the awareness of the kind or quality of such investments. Global
finance and the commodity treatment of money allow purchasing power to move anywhere in the
world without consideration of, or from, those who supply the funds through equity or debt
(IOUs representing past (equity), and future (debt) human effort). Investment through mutual
funds greatly enhances this characteristic of blind, remote, unconscious investment by diluting
the influence and responsibility of personal input such that virtually anything may be done with
your purchasing power, irrespective of any moral or social convictions you may have. Without
your explicit permission or awareness, your purchasing power may be used to finance war,
weapons, environmental destruction, and social , political and economic upheaval. I dare say this
could not be the case if we favoured local investment rather than the long distance, disconnected
kind of investment we now engage in.
The following topics are all effects on local communities and economies which I believe
to primarily be results of our current financial and stock market systems, which in turn are in
large part fed by our system of taxation:
1. Non-local investment
It is highly unlikely that one would export their purchasing power to a
centralized accounting system that has the over-all effect of removing it from
circulation in the real value trading economy, in particular if this purchasing
power might be put to good use locally such that the lives of all members of the
community would be enhanced. The current tax incentive program punishes those
who would invest at this level by rewarding stock market investments over local
economics.
In this manner, all of our locally earned surplus value is exported to a
non-productive, non-local service and cannot be utilized by our own good sense.
Since we no longer have access to this surplus, rather than community members
exercising their right and privilege of financing one another with their equity,
local businesses and personal endeavors are instead financed by another nonlocal
institution - a bank, an institution given existence by the right of the people
through their government to provide accounting in the flow of IOUs through
society, but one which claims ownership of these funds and the right to charge for
the privilege of their use.
One must keep in mind that all of this comes about because of the
existence of interest and taxes, neither one of which seem to be necessary except
to serve a select few who may be quite satisfied if we remain ignorant.
2. Lack of local diversification and sustainability
The second point follows quite naturally from the first. Because we are
not focused on thriving as locally supported, somewhat independent communities,
we are forced by the very same implements to commit to the serving of large
financial interests who only have a temporary interest in our well-being, the
duration of which is limited to our use and effort in their favour. The result is that
many communities become one industry towns and suffer the inevitable
consequences when large corporations leave town without so much as a thank
you. We are often made to feel as if it is they who are doing us the favour.
Local industry which may have been more modest in scope, but which
supported its community in a more or less equitable manner, soon falls by the
wayside and is lost as a source of community health, sustenance, and traditional
values. Examples of this lie all across the Canadian prairies in the small towns
that have all but disappeared or been transformed into bedroom communities and
commuter villages serving non-local interests.
Alternatively, surplus purchasing power spent in the local economy has a
very real potential for long term sustainable economic growth, particularly if the
industry serves the needs of the locals.
The way I see it currently, it is hard to imagine a return to locally
sustainable communities that thrive on shared community enterprises and goals
unless the control and responsibility for finance and resources is returned to the
local level. That is a condition which we have been moving away from, probably
for thousands of years. Our current concepts of business, prosperity, and wellbeing
at the personal and community levels are very much entangled with our
concepts surrounding money and industry as they now exist. The mind-set is well
ingrained in our common psyche.
If beneficial change is to occur, however, I am sure that we must reassert
our rights at the community and personal levels to own the benefits of finance,
government, and industry. Otherwise, this serpent we call the modern industrial
global economy will continue to eat its own tail as it has been doing at an
exponentially increasing pace.
3. Risk and loss to mobile work force
Displaced individuals and families who have come to town during a
temporary economic boom, having purchased homes at inflated prices, must now
seek employment elsewhere, usually at the site of the next boom. Unfortunately,
they must sell their high priced property at a much lower price because everyone
is leaving town at the same time. (Do you think real estate is an “investment” for
those seeking shelter and jobs?)
Larger cities may be somewhat less affected by boom/bust cycles and
population fluctuations, but they are certainly not immune. Even though a larger
center will generally have a more diversified economy, they still tend to establish
around one or more central industries that serve and are dependent on much larger
populations than itself. In that sense, a modern industrial center is a centralized
production facility whose primary products are produced for geographically
remote areas.
4. Destabilization of communities
In addition to the obvious examples of community destabilization that
have already been mentioned above, there are many subtler and many more gross
examples. Among the subtler effects is the effect upon the character and
traditional values of communities as centers of social evolution. Social evolution
is certainly happening in any case; it’s just that the primary values that determine
its direction are more market oriented than they are oriented towards human
fulfillment and socially mature values and growth.
The tremendous economic power that is concentrated by means of the
current, centralized financial machinery (banking, currency and commodity
exchanges, stock markets, etc.) is far removed from considerations of any moral,
sacred or social local tradition. The very survival of a community may be
dependent on the whims or virtues of a soulless corporate entity whose primary
objectives are set in a country which has no knowledge of or affinity to the values
of its new temporary home. If the local government or spokepersons for the
community are not onside with any proposed development in their area, they are
ill-equipped to defend their interests against this economic might. There is
literally no limit to the violations that may be undertaken to satisfy an
organization that is guided only by the maxim of “maximizing the returns to
shareholders.” Who is to take responsibility for an artificial organism that has no
life and so cannot respect it? Those who are paid to direct it are as temporary as
the location of the next project.
Among the more gross examples of economic tyranny conducted in the
name of progress, development, democracy, liberty, or any other convenient
rationalization for taking economic advantage of our neighbours, is the oldest
power game in the book - war. While we may hate to admit it and will find any
other name for it, greed as perpetrated by vast and subtle economic means has no
greater accomplice than war. This is the ultimate destabilization and it is not
merely incidental to the movement of capital, and can even be tactical and
strategic by intent, much in the manner of a business plan. This was the old way
of doing business for empire builders. Since then, they have devised much more
effective and less expensive means of achieving their goals - the financial
machinery I’ve been talking about; but if push comes to shove, the old tried and
true means of getting and keeping power still have some dry powder.
5. Displacement of capital beyond the responsible reach and oversight of
investors
You may think that I have crossed the line in my analysis and have
become entirely too cynical, but how can this not be true? If you have the way
and the means to grow, and growth is your only option, or you perish, what must
you do? You follow your nose and your nature. The nature of the contemporary
global conglomerate, financed by your IOUs, your savings and effort, through the
financial and monetary system, is to grow and to keep growing. Since it is
artificial and disconnected from life, it is unconcerned with human values beyond
its reason for being - to maximize shareholder’s value. Once the fruits of our
labour, our IOUs, our capital, our investments, have been de-coupled from our
own decision-making and placed in the hands of unknowable agents who may
share none of our own values, they are now free to be employed in any way at all,
even to our own detriment.
A less extreme example of amoral corporate behaviour is the pervasive
pollution which is the inevitable by-product of any industrial process. We are all
familiar with the continual conflict between community economic interests and
environmental issues. Unfortunately, the economic interests usually win any real
battles because the community comes under threat of loss of its livelihood if
proposed developments are not allowed to progress more or less unfettered by
such concerns. This conundrum is inevitable given the dependency we have built
into our economic partnerships with industry and the essentially non-local focus
and power of these entities. The price is paid well into the future in terms of long
term financial servitude to taxes and infrastructure, pollution and health issues
which survive the benefit of development, unstable and volatile economic
characteristics, and devalued social structures. (I’m sure this list is not allinclusive.)
When you consider the entire planet is now overrun with our way of
“doing business”, we might well ask if the planet itself is at risk by the pervasive
amoral character of industry and finance and all that they entail.
I daresay that environmental concerns would not be quite so prevalent if
local economic sustainability was the common practice of communities around
the world, rather than the socially perverse investment structures which currently
direct, or shall I say mis-direct, human effort. As many a wise man has said, “You
don’t s - - t in your own back yard unless you’re willing to clean it up.”
6. Feeding of power structures that work against social interest
This topic has already been covered in part by previous discussion, but it
bears emphasis. The anonymous nature and scale of highly concentrated or
centralized economic power is inherently detrimental to social interests because
those interests are generally at the local level. Large scale economic intervention
by financial/industrial interests can only hope to minimize conflict by some form
of appeasement as opposed to being completely aligned with the communities
(and their resources) that it must exploit. Without reference to any ulterior
motives other than the shareholders’ requirement of profit, this would be true
strictly as a function of the scale itself. Industrial activity is rarely, if ever, scaled
to meet the needs of those whom it exploits.
Needless to say, the tremendous clout wielded by these financial
behemoths breeds opportunities for corruption and socially adverse activities in
promotion of the interests of the corporation. (For a rather comprehensive look at
the degrees and kinds of intervention by corporate and financial entities against
entire countries, I would highly recommend a book called “The Shock Doctrine”
by Naomi Klein.)
Even governments, possibly especially governments and their agents, are
susceptible to being encouraged or coerced against the interests of the people they
are elected to serve. This is a large topic deserving of much elaboration on its
own. In fact, I do not personally believe that the financial power that now exists
against the interests of people all over the world could be in place without the
cooperation of governments. Whether all governments are inherently corrupt or
collusive with business or merely collectively ignorant of the effect of the laws
and machinery they have put in place, I am not sure; but one or the other must be
the case. Neither one is high testament to the value of governments.
Given our determination that taxes are basically unnecessary, it is
interesting to note the vast number of laws and rules that are dedicated to the
collection of taxes and the administration of the task. (Just for fun, walk into a tax
lawyer’s or accountant’s office and ask to see his collection of tax law and
interpretation bulletins.) Throughout our brief history, tax and banking laws have
been written with considerable input from the corporate elite who wield influence
in the halls of power. If taxes and interest are not necessary, we need not wonder
any further who is served by their existence. We can be sure it is not for you or I.
Governments around the world are influenced by subtle intervention or by
forceful coercion to develop law, policy, and government structure in the interests
of money and power and against the social interests of its own people. Even in
this country, while it may be difficult to prove in any particular case, we at least
suspect it to be true when we witness obvious dysfunction at the government
level. (An example of government turning a blind eye because of conflicted
motives is the obvious collusion of oil companies in the setting of gas prices. If it
is obvious to everyone else, why isn’t it obvious to governments who are
responsible for regulating and over-seeing such things?)
This is a situation that could not maintain quite so easily if we were to
bring decision-making and finance back to the local level where the effects of our
effort could be properly monitored and administered to our own satisfaction.
7. Capture of local economic effort
Being completely dependent on a centrally controlled, non-local industrial
and financial mandate, the majority of the workforce in any given industrial
community will not be engaged in locally sustainable economic activity.
While the desire may exist in the community to promote such an economy,
the “rules of engagement” are written in favour of those with financial power and
economies of scale. Small business and local concerns will not survive in a
competition for labour or resources against the advantages of big business. This is
particularly true of the labour market where steady wages, generally higher than
local businesses can pay, with benefits and pensions, hold heavy sway with most
of the workforce. The opportunities to diversify and create wholesome
commercial activity which would serve everyone locally long into the future are
therefore severely compromised. Labour which may benefit the local community
in a sustainable way is not available while it serves the interests of larger, distant
concerns. This lack is made up for by importing goods and services from abroad
rather than providing them locally.
When the large, profitable, but temporary industry has left, the
community’s ability in talent, labour, and resources is usually not sufficient to
quickly reestablish sustainable livelihood. There is usually a considerable amount
of economic pain involved. The newfound lack is compounded by falling home
prices, lingering debt, environmental impacts, over-specialization in obsolete skill
sets, and increased taxes required to pay for the infrastructure which was put in
place to serve the needs of the temporary workforce and industry.
8. Capture of ownership of all natural resources
By the power of centrally directed and controlled finance and government,
the resources of a country or community come into the hands of those in
alignment with agendas which do not necessarily serve the community or the
individuals within it. With the power of law, might and money at the beck and
call of those who set agendas on a national or international scale, there is little that
can be done to retain natural abundance and sustenance as the right of indigenous
or local populations.
Current modern social structures that derive from the “might is right”
mentality, albeit somewhat couched in themes of benign deliverance from poverty
and ignorance, do not see a need to find means to sustain themselves locally when
they may purchase, by the very labour of the local populations which they exploit,
that which they deem is their right to own.
Incidentally, of $532 billion in consolidated government revenue in Canada in 2006, only
$768 million, just over 3/4 of 1 of the 532 billions, or 0.14%, $14 dollars out of every $10,000 in
government revenue, came from natural resource taxes and licences - the lowest contributor to
government revenue (StatsCan., “Consolidated federal, provincial, territorial, and local
government” revenue and expenditures, 2002 - 2006). Presumably, this is the amount we are
receiving from corporations for the right to exploit the wealth we hold in common - our natural
resources. The rest of government revenue comes from us through taxes and government
business - i.e. from the labour and pockets of the people in direct taxes or in the prices paid to
corporations in goods and services. Aside from this paltry payment for our resources, we are to
be satisfied with the wages we receive, at least for as long as they last. When the resources are
gone and the jobs along with them, what will we be retaining but the unpleasant aftermath?
Should resource development not ensure that the benefits of it go where they belong - to the
people who labour to produce the wealth? Who should own the benefits of labour and resources
if not the people? Unfortunately, as it may now be dawning on you, these benefits are accruing
through the financial system to those who claim ownership of your IOUs, your effort, and your
resources, and by the blessings of your government. (For an example of how resources seem not
to be owned by the people, billions are made in profits by oil conglomerates working in our local
area (Cold Lake, Canada), but our small city begs with no success for a share of the tax revenue
which goes to the municipal district from oil revenue. Our city operates at a deficit during times
of plenty. A small fraction of oil profits would be sufficient to meet local needs, but we are
expected to make up short-falls with increased taxes to property owners instead. Information
and some commentary on the oil industry is in appendix 4.)
In the development of such resources, usually claimed by law to be held in
the common interest by the nation, the rights to these resources usually transfer by
mysterious means to corporate interests, in exchange for which the local
population is encouraged to accept temporary employment (all employment must
be considered temporary) as fitting payment. With such payment, they may pay
the taxes and interest incurred in their employment, feed themselves for the
duration of the economic viability of the development, and worry about the
environmental, health, and financial debt left in its wake at some future time. The
cost in further human effort in meeting the requirements of the aftermath of
“economic prosperity” is usually not calculated in advance, particularly because
those who will gain the most from it will not be left to pay the final bill.
It is a testament to the ingenuity of the human spirit that local economies
still do manage to recover. But they do not recover because of any benefits of
government, industry and finance, but in spite of them, in my opinion. Just
imagine what they could achieve without the disadvantage of usurped human
effort in the interests of centralized power and money.
9. Flow of ownership to concentrated financial capital
This topic alone is huge. In a way, it takes in all of the above items
because this factor is the very objective of the financial/monetary system from my
point of view. The intention of the collaborative efforts between financial and
government power structures has never been to distribute wealth and benefit
evenly across the geographic and social spectrums, although that is often the
reason cited for their actions and policies. Ownership and control tend to
concentrate according to the ability of those who seek power to do so.
Flows of Wealth and Power
In my opinion, the intended benefit and function of government as agents of the people is
to curtail the above list of tendencies, none of which serve the public interest, wherever they exist
to the detriment of society and individual rights and freedoms. We are all led to believe that
these rights and freedoms are intrinsic to a democratic society and to basic human rights, but if
they in fact exist, it can only be in spite of our financial and governmental systems, because the
laws that exist do more to serve these institutions as power structures than they do to serve
principles of equality and freedom.
The following provides indications of the flow of ownership and decision-making power
through our financial and tax management systems.
Foreign ownership
In the last section, we talked about the tendency for local capital to leave the community
as a result of the advantages given to publicly traded companies through the tax and stock market
systems. This flow, which concentrates money, power, and control towards a central nexus, does
not stop at our national borders. (I recommend a perusal of appendix 2 at this point.) Foreign
ownership has increased steadily over the last number of years, and is likely to continue
considering the apparent advantage that seems to prevail in its favour. Profit margins of foreign
companies doing business in Canada are also markedly higher than those of Canadian companies,
probably because they only buy the best potentials and leave the rest behind. This steady erosion
of Canadian ownership is aided by the very same systems that are usurping our purchasing power
in other ways - finance and tax.
Capital which is used to finance the purchase of Canadian companies by foreign interests
is raised by the issuance of stock in the companies and by debt financing through conventional
banking. Much of the capital may actually come from Canadian investors in these foreign
businesses. Adding insult to injury, the debt financing may come directly or indirectly, and is
most likely to do so, from Canadian financial institutions. Due to the gigantic size of the
companies which may come to town, they do not give up much control just because they may use
your own money to buy your future away from you.
(Here’s a scenario to imagine: Your money is invested through an RSP in an American
company which used to do business in your town as a Canadian owned enterprise, but which has
recently moved on to bigger and better offers from the country next door. As a result, you no
longer have a job and no income. Your house is losing value as fast as your neighbours are
leaving town, so you’re afraid to sell it because you would lose most of your equity and you
would still “owe” the bank, who also financed the takeover of the business in the first place.
You decide to liquidate your RSP to meet the cost of your living, but you discover that the
value of the stock in the hands of the American company is not quite as robust as it was before
the takeover. This kind of thing has been happening across the country, you’ve heard. Ah well,
you suck it up and take out your RSP, after paying the taxes, of course, and wonder when the
next gift will come from the gods of financial wisdom.)
Besides the fact that your purchasing power, which represents your credit for your
previous efforts, may have been used to finance the takeover through the stock issue, your share
of the resource which is held in common by you and your fellow countrymen may have been put
up as the collateral for the loan which completed the financing. (There does not have to be a
direct claim against the resources, but the anticipated cash flows will figure into the equation.)
The actual work will be done by the able people in the community, the resources will be taken
from the area, and the financing will be supplied based on the presence of each. The only
component that is foreign is the ownership control and the claims against future cash flow which
will leave your area and most likely the country.
By this process, we are selling the country without the benefit of local community profit,
increasing our debt levels, diminishing our resources, degrading our environment, and wasting
our opportunities for a long term livelihood and social stability.
The profit advantage of foreign corporations over Canadian is showing up in the asset
growth disparities (appendix 2). A compounding effect of this condition, if it should continue, is
a recipe for the eventual transfer of Canadian business to U.S. and foreign interests. The only
businesses left in Canadian hands will be the ones nobody else wants, if that isn’t already the
case. If those left over should become desirable acquisitions to large multinational corporations,
these companies may use the effort of the local population to do the work and to back the IOUs
required to fund the purchase, all with the blessings of our financial institutions, which will very
likely finance the acquisitions by those same efforts, not to mention the further blessings of our
governments, who only seem concerned with the possibility of gaining yet more taxes for those
who will temporarily be employed in the venture.
The Alberta Oil Sands
While the oil sands business is not wholly owned by foreign interests, it certainly is in
large part. The following quotation from a Canadian Energy Research Institute (CERI) report
indicates examples of revenue flows and shares of that revenue that may end up in local
communities. The comments are somewhat specific to Alberta and the oil industry, but they
serve to illustrate the way resource development and economic opportunity is discussed among
decision-makers.
“A large portion of the economic spin-offs from oil sands development relates to
employment that is generated outside Alberta. The impact of the income associated with people
who make the materials, goods and services used by the oil sands sector generates significant
taxes to other governments in Canada. The CERI study (2005) shows the largest percentage of
the government revenue (taxes and royalties) accrues to the Federal Government, not Alberta.
Over the 20-year study period, CERI estimates the total government revenues at $123 billion
dollars (income tax, royalties, corporate tax, provincial sales tax, GST, property tax, etc.*) as a
result of investment and development in oil sands.
The government shares of the revenues are: federal 41%, Alberta 36%, and other governments
and municipalities combined 23%.” (Oil Sands Economic Impacts Across Canada- CERI report,
2005)
As implied above, the bulk of the above stated $123B does not come directly out of
industry revenues, but is as a result of spin-off economic activity and wages which would have
been ~1-2% of total consolidated government revenue over the 20 year period between 1985 and
2005. The study covered the years between 2000 and 2020, which is a period in which
government revenues will likely be much higher, even in constant 2005 dollars; thus government
revenues from oil sands generated tax would be only around 1% of total government revenues.
The study indicated that industry revenues over this time would likely be in the neighborhood of
around $500 billion. According to world oil industry analysts [Hargrove, 2005], the gross
margins in the industry are in the 50% area. (See appendix 4.)
We soon get the idea from the quote that we should be satisfied with the fact that we have
jobs and that our governments can collect taxes that result from the incomes generated by those
jobs. There is no mention of our outright ownership (*) of, or partnership in, the resource or the
notion that the developers are the privileged ones, by an arrangement that gives them all the
benefits of ownership without having to purchase it.
Can you imagine someone coming onto your land, asking you to cut all the timber for a
house from that land, then asking you to build the house, paying you wages of 1/3 the value of
the house, and then charging you for the whole value of the house without contributing one iota
of input to the project? This is completely analogous to the resource development situation in
Alberta, in Canada, and probably anywhere else in the world where there is a central bank, a tax
system, a stock market, and the attending multi-national conglomerates.
We also see from the quote that the distribution of tax revenue increases as distance from
the project increases. This suggests that more taxes are generated in a centralized fashion,
possibly because more jobs are actually created at these centers by the spin-off effect. However,
I find it hard to believe that more oil-field related jobs are created in Ottawa than they are on site
of the project. The taxes are not being collected based on proportional contribution of effort, but
on the ability of a central structure to capture this tax through legislation. In the interests of
sharing the wealth, there may be some merit to this, but the structure does not provide for
negotiation on the matter in any case.
Revenue flows between levels of government
The following figures are from Appendix 3 and show the relative flows of government
revenues between the federal government of Canada, the province of Alberta, and the local
governments within the municipal district of Bonnyville, Alberta. While there may be some
unique characteristics to these specific relationships, they are meant to serve here merely as
examples for the purposes of discussion and illustration for a community with which I am
familiar. The principles which I mean to illustrate will pertain to almost any similar community
and set of circumstances.
Comparison of revenue and transfer flows between gov’t levels.
(2005) Gross($mill.) per Capita
1. Federal Revenue $212,000 $ 6,516 (minus Prov. and local)
2. Alberta Revenue $ 36,000 $10,285
3. Local g’ovt* $ 61 $ 2,033
4. Total per capita revenue $18,834
5. Federal transfers to Alberta $ 3,391 $ 969
6. Alberta transfers to local g’ovt* $ 15 $ 508
Of the total amount of per capita revenue ($18,834), all but $2,033 goes to levels above the local gov’ts. $508/cap is the amount that
comes back from higher levels to be used locally.
This gives: $2,033/cap for use at the local level
$16,801/cap for use at higher levels
(Please see appendix 3 for notes and sources. * Local governments in this case are the city of Cold Lake, the town of Bonnyville, and the M.D.
of Bonnyville. Numbers are consolidated in the above table for the purposes of this report.)
We discussed the fact that all value is created at the local level by the input of local
participants and resources and how local populations are led to believe that the jobs that are
provided are sufficient returns for the exploitation of their labour and resources. We also
discussed how the rewards accumulate in favour of non-local entities. The illustration above
shows how governments, as well as industry and finance, are also beneficiaries of local economic
activity in a manner which is disproportionate to their contributions.
From the above, it can be seen that the vast majority of taxes that are collected at any one
local level are going disproportionately to the national and provincial levels. The small amount
that remains in the hands of local governments are meant to suffice in the delivery of all local
government provided services. However, services are utilized at the local level, not the national
level. What service are you receiving from the national level? Even services that may be
authorized from the national level must be provided locally. For instance, what good is a doctor
in Ottawa to a sick person needing hospital care here? Any government services that are
nationally authorized must be delivered by those who deliver effort locally, not in Ottawa, for
example.
Centralized governments have power to take larger shares of economic benefits through
their tax programs and legislation. Local governments must then beg for their share back from
the upper levels, leaving the short-falls to be made up by yet further taxation at the local level.
While there may be some services that are best provided at the national and provincial levels, I
am hard pressed to believe that they are justifiably in the same proportion as the above shown tax
distribution. In this (Bonnyville, Alberta) municipal area, over half a billion dollars are
collected in government revenues (local population of 35,000) that goes to higher levels and
does not come back to the community. I’m sure that, if we collected this tax for use at the local
level, we would have more than enough to meet our local public needs without debt. As it now
stands, we are accumulating a huge debt at the city level, which has no access to revenue
generated in the municipal district through resource development taxes, but which must meet its
shortfall with ever-increasing tax burdens upon those that live within its borders. The oil
companies and non-local governments are awash in windfall revenues while those who provide
the effort in development are left to go begging.
( As a rough calculated guess, an estimate of the total of all taxes, interest, and corporate
profit derived from the exploitation of local natural resources in this local area that would leave
the area and not return to benefit the community would be in the neighborhood of $1 billion per
year [approximately $100,000 per family unit in the community]. While some of this may
justifiably be distributed to outside entities in recognition of contribution and/or sharing
principles, surely there is sufficient surplus so as to provide for the future needs of the
community without loss or debt, simply as our share in the partnership.)
“Effective regional-wide governance is needed because of the current fiscal system . . . .since 1992, provincial
transfers as a percentage of total revenue to Alberta municipalities has decreased from 22% to 11%. Furthermore,
since 1992, there has been a change in the composition of grants given to municipalities, The Province essentially
has eliminated unconditional grants in favour of project specific grants. In 1992 the provincial transfers consisted of
15% conditional grants and 7% unconditional grants. In 2005, provincial transfers consisted of 11% conditional
grants and 0.3% unconditional grants.
As a result of the reduced reliance of provincial transfers, municipalities have increasingly relied upon property taxes
to make up for the loss in revenue from provincial transfers. In 1988, revenue from provincial transfers and property
taxes were nearly identical, however in 2005, property taxes increased to 29% of municipal revenue, while
provincial transfers decreased to 11%.”
(Quoted from: Regional Government vs. Governance, Austrom Consulting, for the municipalities
of Cold Lake, Bonnyville, and the M.D. of Bonnyville)
In our current economic boom, which is fueled by the extraordinary increases in the price
and demand for oil, we hear much about the need for improved infrastructure to service the
demands of the boom - population increases, business activity increases, etc. Most of the
increased demand for infrastructure, goods and services comes from the tremendous construction
activity that occurs during such booms, and is therefore of a temporary nature. Subsequent
declines in economic activity are a certainty, depending on the eventual slowdown in
construction and capital expenditures necessary to bring energy on line. Once this slowdown
occurs (note: definitely underway at the point of this current editing- October, 2008), the benefits
to the local community begin to diminish and the risks that are associated with such booms
become readily apparent. Job losses beget declining real estate values and the attendant losses of
equity to those not lucky enough to have “got out in time”. Meanwhile, with the physical plants
in place, industry has only begun to reap the benefits of their exploitation process. The benefits
of development outlive the initial investment for industry, but the same cannot be said for the
local population.
In order to sell the prospect of development, jobs and business opportunities are dangled
like carrots in the faces of the locals, while governments salivate at the increases in tax bases.
When industry is done in the area, they move on to the next opportunity for exploitation by the
same means. As far as government is concerned, their next opportunity lies with industry as
well, and the locals are left to fend for themselves or go begging for support from above in the
government hierarchy.
Thus, sustainability, a catch-word in environment and economic issues these days, is not
built into the equation where development of resources is concerned. If it were, there would be
sufficient surplus retained within the community itself such that re-investment would ensure
continued economic benefit. In short, local communities are not treated as true partners in
development because they are not considered to have an ownership stake in the same. In this
country at least, ownership of public or common wealth is something that somehow ends up in
the hands of industry, and subsequently must be re-purchased, if it is to be acquired at all, by
participation in the stock market system. Other than that, we are thought to have received our
benefit of ownership in common by the fact that we may have a job and that our government is
collecting taxes from us, some of which we may get back, most of which we will not.
Considering that taxes are basically unnecessary, by our discussion of what money really
is, and that all finance stems from the value created by those who provide effort, as well as the
resources, it behooves us to re-consider the distribution of benefits of all economic activity.
Currently, through finance, tax, and business profits (banks, government, and publicly traded
corporations), the people who own the resources and provide the effort and the funds (by
fulfilling their promises) are the least to benefit.
Pyramiding of financial power and social control
A primary effect of the centralized financial power is that decision-making also becomes
more centralized and less connected to the needs of local communities. Higher levels of
government absorb more of the public credit but deliver less value. This creates an artificial
scarcity of resources at the local level because real effort is required to support the centralized
structure.
The Ant Wars
Imagine an ant colony which has been reorganized from its natural activity in
support of its own colony to labour in the building of a giant administrative center a
long distance from its home. The work and time required to fulfill this obligation
detracts from the ability of the colony to support itself in an adequate fashion, resulting
in gaps which it now begins to imagine can only be filled by the grace of the centralized
administration it has faithfully supported. It forgets or does not realize that there is
nothing that this central structure can provide that it may not provide for itself. As
long as it labours under this illusion, the colony will suffer the consequences of this
extreme inefficiency.
The obligations that will pile increasingly on the colony to feed this central
control hive will continue to grow because that is the nature of the control hive. While
this central hive is growing, the colonies which feed it become increasingly
compromised in their ability to support themselves. The central hive begins to demand
specialized services that it cannot provide for itself. In turn, the colonies become more
specialized and therefore less able to provide the variety of services that were once
commonly and adequately available. Now the colony is even more dependent on the
auspices of the central hive because the hive holds the control mechanisms which allow
the distribution of services back to the colonies.
“Although we have adequate antpower and dirt with which to construct the new
hill which must be constructed to accommodate the growth in our labour force, all in
service to the production of dirt for export, we must have the money which will allow us
to proceed. Unfortunately, this money is not available.”
“How can the money not be available if everything else is present that would
allow us to provide ourselves with that which we require?”
“The solution to our economic problems is clear.” says the stalwart minister of
finance. We must become better off. We can only become better off if we sell some of
our fine dirt to those who desire it.”
“Don’t they have their own dirt?”, asks some unconscious upstart.
“Yes, but they do not have the time to process it, so we will do it for them and
they will pay us for it.”
“Why don’t they have the time to process it?” replies the pain-in-the-ass upstart.
“They are presently engaged in the construction of a central administration
facility and their labour and resources and are presently being consumed by the effort.
Obviously, they are not as proficient at economic matters as we are, but that will be to
our benefit.”
“But how are we to be paid if they have no available labour and resources?”
queries the curious upstart.
“Leave matters of finance to those who know better than yourselves. They will
pay us with ‘money’. Then we will be able to pay the taxes that are accruing in our
failure to adequately support ourselves and we will have surplus money of our own to
purchase those things that we now are lacking.” By now the minister is becoming quite
impatient with the ignorance of the young idiot in the audience.
Not quite satisfied with the proposed solution, the young ant gulps and holds his
breath, knowing he is near the end of the patience of the honorable leader to whom he
owes so much, and asks, “But if they are working at capacity now and we are working at
capacity now, who will have the time or resources to deliver those things we need which
we will purchase with our money? How does money provide for us what we cannot
provide for ourselves? And if we sell them all our dirt, will we have any left for
ourselves? What good will money be then? All of this activity is only leading us further
away from the very thing that we seek, isn’t it?”
“Young man,” fumes the minister, “You forget what the natural result of having
lived beyond your means these many years has cost. We have accumulated huge debt
which must be repaid to our benefactors, the financial providers of money, not to
mention the now vast annual requirement for funds in the form of taxes that must pay
for all of the services you demand so incessantly. There is a price to be paid for living in
the most affluent hive in our world. Do not shirk your duty to deliver your share of this
cost. More effort is required on your part.”
Soon the colonies are wasted by the incessant running in both directions, failing
to adequately provide for themselves and feeding a central hive which seems to serve no
real purpose. Dissent begins amongst the individuals comprising the local colony hives,
requiring the imposition of more control structures in the form of laws, penalties, and
enforcement. Permissions must be acquired in order to achieve almost anything. Of
course, these permissions must be paid for. The cost of administering these controls
and “protective” mechanisms must also be paid. Yet more effort is required.
Eventually, the control hive must organize itself to defend against those it exists
to serve. More resources go to the maintenance of the soldier ants whose primary
concern is not the defense of the total collective from forces external to the ant
population, but rather to be prepared for the inevitable backlash, that must eventually
result, from the population itself.
Finally, some of the wise elders amongst the colonies begin to suspect that there
really was no other purpose for the soldiers in the first place. They only exist to control
the population and maintain the structure that is feeding on them all. Restlessness
begins to build among the colonists.
The temporary stopgap to the backlash is to extend the boundaries of influence
of the control hive to external populations of ants, who coincidentally are not favoured
with the benefits of such an enlightened system of democratic servitude and whose
population will be only too willing to come on board once they see the error of their
ways. Their labour and resource contributions will be rewarded by the benefits of
economic progress. Alternatively, they may resist the gift of prosperity and freedom
offered by this forward thinking hive, and unfortunate force must regrettably be
engaged in the worthy cause; a cause which can only be aided by the fact that the
neighbouring colonies do not believe in the same Ant God.
Seeking any change that will lighten their loads, the original colonies are anxious
to undertake any solution. Perhaps when the additional antpower and resources are
made available by the new territory, which would be justifiably gained in the liberation
of the neighbouring hives, the colonists financial problems will finally be resolved. The
original colonies gamely jump on board with the plan to increase their lot, again failing
to remember the abundance that was once theirs by nature, and how they came to be in
this current condition of lack.
Distracted from reason by the constant requirement for evermore effort, and
momentarily appeased by the reassurances that come in a steady stream from the
officially sanctioned collectors and disseminators of information, the population accepts
their lot as inevitable. The causes of their plight must be external to themselves. Only
righteous action on the part of their leaders against these unnameable external
miscreants can remedy the obvious injustice in their lives.
War is declared.
Years later, the aftermath has left many scars, but over time they are temporarily
forgotten in the newfound affluence that seems to be prevalent in the expanded
territories. The ant force becomes accustomed to their new specialized activities and
look forward to the time when they may relax and enjoy the fruits of their labour in the
coming retirement years. Of course, they must ensure that sufficient surplus has been
set aside to pay the ever-increasing tax, but that is the price of prosperity and there is
still plenty of dirt to mine in the new territories, although it is certainly not of the same
quality as their native dirt which has been exported, and of which none is now
remaining. True, it must now be imported to the local area, and at considerably higher
costs in labour and resources, but our financial leaders within the Inter-colonial
Monetary Fund will find a way if we should run short. They always do, don’t they?
Apart from the occasional outburst from some ingrate belonging to the foreign
factions from the newly liberated colonies, peace seems to be here at last.
This prosperity lasted for almost an entire generation before the colonies again
began to suffer from the lack they could not explain. Unfortunately, by this time they
had almost entirely forgotten from whence abundance truly comes, and so continued
with yet another campaign designed to improve their lot, much in the manner of the
serpent eating its own tail.
Quite the can of worms, eh?
Much more might be said, as I’ve only managed to peek inside the can of worms we are
opening. We could talk about the gradual but constant degradation of quality of service and
product that comes from continually striving to hold our ground in any constantly eroding
economic situation. We could talk about the continual shift of wealth from the bottom to the
top of the income strata that comes from the automatic advantage transferred to those who wield
greater financial clout. We could talk about how we are forced to think in terms of competition
rather than cooperation in our social endeavors. We might also mention the erosion of
community values in favour of economic rule. Each of these topics could stand alone as
worthwhile subjects for entire books, and if this document has any legs at all, hopefully someone
will undertake to explore these things; but the point here is that all of these and many other social
ills have their common source in the monetary machinery we have been discussing.
It is important to consider that this system, which is one which works well to shift wealth
upwards and make a mockery of any concepts of equality and freedom we may harbour, is one
which is supported by law. Laws which do not serve the people equitably ought to be changed.
Who can change them? We can.
All law in our country is ostensibly written for the collective benefit. They are our laws.
The fact that they are working against us is tragic and probably tells us much about our lack of
due diligence in the making and administering of them. Whatever the case may be here, it is still
up to us to rewrite every one if that’s what it takes to restore sanity and equality to the people. If
we are lax, or if we are satisfied that sufficient advantage is in our favour, and that we need not
concern ourselves with the plight of others less able or fortunate, then perhaps we may continue
on for a while. I suggest, however, that we have not got far to go before that choice will no
longer be available, for many various reasons.
While a comprehensive study of law is beyond my scope and ability, the reasoning of this
document is not. I encourage none to accept this without giving careful consideration to it. I
may very well be in error about much, or even all, of this. My feeling though, is that this
reasoning is essentially sound.
There is nothing truly original in this essay on a point by point basis. Most or all of this
has been put forward by others in this country and abroad at various times in our history. There
may be differences as to approach or definition and even complete disagreement as to some
concepts, but in essence this essay is just another way of saying what many others have said in
the past in their own ways. In order to wrap my head around what they were saying, I had to
approach it from my own viewpoint. In many ways, my route was much more circuitous and less
intuitive than theirs. We share a common belief in the essential requirement for monetary
reform, however, and I am most grateful for having been led to their thoughts and writings on the
matter.
Having said that, the fact remains that we are still suffering at the hands of our own
collective ignorance - ignorance as to the nature of money, ignorance of the laws that create and
allow the travesty in the first place, and ignorance of our own apathy as the ultimate cause.
It has been mentioned by others that virtually every law in this country is of a commercial
nature and in service to “the money power”, as it was once called by Abraham Lincoln. If this is
true, then we must reexamine the following laws and documents, and their governing
organizations, etc. to discover how this may have come about and what is to be done about it.
All of these are represented as being for the collective benefit (with the possible exception of the
Statute of Westminster which is British) and in keeping with our views and beliefs about what
freedom, democracy, equality, etc. are truly all about. If these things are not served, then these
laws, documents, and organizations are ours to change to more aptly suit our purposes.
* The Constitution Act (The BNA Act)
* The Statute of Westminster (British)
* The Charter of Rights and Freedoms
* The Bank Act
* The Income Tax Act
* The Bills of Exchange Act
* The Bretton-Woods Agreements
* The Bank of Canada (all central banks)
* The World Bank and International Monetary Fund
* The World Trade Organization
With respect to the BNA Act, many would argue convincingly that this Act is not a
constitution at all because it was a British document which merely defined the relationship of the
British Crown to the colony (dominion) of Canada. Any proper constitution would have been
written by us and brought into effect by popular consensus rather than handed down as a fait
accompli.
Other laws may also require a careful perusal, in particular those which may seem to give
jurisdiction of essential rights over to any entity which fails to recognize the fundamental
superiority of human right over human law.
I have been writing about Canada and using the province and area in which I live as the
background for discussion. However, I am certain that the essential characteristics of the
monetary system and the systems and institutions which support it are not unique to this country.
They are in place around the world. There is essentially only one system. This system crosses
borders with impunity. By the power of the World Bank, the International Monetary Fund, the
World Trade Organization, and various other international institutions, this system is completely
independent of any national standards of nationhood. It is independent of the laws of any
particular country that would attempt to entrench basic human rights as universal priorities.
“Permit me to issue and control the money of a nation, and I care not who makes its
laws...” Mayer Anselm Rothschild
“I believe that banking institutions are more dangerous to our liberties than standing
armies. Already they have raised up a monied aristocracy that has set the government at
defiance. The issuing power should be taken from the banks and restored to the people to whom
it properly belongs.” President Thomas Jefferson
“The few who can understand the system (check money and credits) will either be so
interested in its profits, or so dependent on its favors, that there will be no opposition from that
class, while on the other hand, the great body of the people mentally incapable of
comprehending the tremendous advantage that capital derives from the system, will bear its
burdens without complaint, and perhaps without even suspecting that the system is inimical to
their interests.” Rothschild Brothers of London (?)
It’s not that I believe borders actually serve the interests of the populations within them.
In fact, the borders exist as demarcations which define political power structures much more than
they separate people into cultural groupings which reflect essential differences deemed to be best
kept apart. People are people. Their differences disappear when they sit across the table from
one another and share a meal and stories of life as they see it.
Our differences are played up by those who see an advantage in keeping people separate,
however. Within a border, it is possible to see ourselves as part of a nation which periodically
requires defending, or which is losing economic advantage to its neighbours, or whose major
religion is under threat of annihilation or dilution. Any number of reasons for conflict may be
named by our leaders if we are made to be aware of ourselves as being separate from one
another.
It may be that the nation-state is the best alternative we have for organizing ourselves, I’m
not sure. One thing I am certain of though, is that any ideals of human dignity, freedom,
equality, or any of the higher principles which we all hold dear should not be dependent on the
grace of any government or political power structure. I believe that human life, and all life for
that matter, is sacred and that what we are cannot be limited by human structures or laws.
Therefore, all human laws should strive to protect and glorify our essential natures and no laws
should be in place that fundamentally deny us our sacred rights as given by our common Creator.
A lthough our Charter of Rights and Freedoms recognizes the “supremacy of God”, it falls
far short of recognizing what that truly means. What it means to me is that all human institutions
exist to serve the common man. If they do not do so to our satisfaction, then we have the right
and the power to change them so that they truly reflect this higher ideal. Perhaps it’s time we reestablished
our rights as the natural heirs to liberty, justice, and peace.
The declaration in appendix 5 came about as I was considering the basis for our
relationship as human beings to our institutions, in particular, to our governments. As I realized
that they were in existence to serve the people, but that somehow the relationship had been
turned on its head, and that we seemed to now be in existence to serve them, I began to see how
this could only be possible if we had allowed it in some way. By a gradual process, we had
become slaves to the machine we had invented for our collective betterment. By empowering the
machine, we had disempowered ourselves.
This declaration is my statement to myself as much as it is to those who require
clarification as to our proper relationship. As stated in the declaration, it is my choice as to when
the power of this statement will be activated by its presentation to those who claim authority over
me. I choose to delay this activation because I have no wish to do myself harm or create turmoil
in my life. I believe the time may come, however, when all of us around the world may make
this declaration to those who claim authority over us but have none without our permission. At
that point, we might all begin in earnest to create a world of peace and universal prosperity.
Where do we go from here?
As far as I’m concerned, solutions will begin when we realize that we collectively have
the power to change things for the better and that we are the rightful owners of our collective
government and financial systems. Governments and banks exist to serve us, so let’s take back
that power and redesign whatever needs redesigning.
For instance, there is no real problem with the money system and the technologies that
support it. (If American Express can run a credit system, surely we can as well.) The problem is
with those who claim ownership of it. Failing any attempt we may make to somehow re-capture
these institutions as our own, I see no reason why we cannot set up a similar system for
ourselves, one which is not usurious but which serves the purpose of the general public rather
than a select few.
As far as government is concerned, reforms seem to be in order. Governments have to be
reminded of who they work for and that the monetary system is something that we all should
benefit from rather than be slaves to.
I’m not sure how confident I am that this will actually happen, however, because we
would first have to take responsibility for the way things are. This implies that we may have to
change many things which we would just as soon leave alone. Those who are comfortable with
the status quo will have the hardest time here. Unfortunately, those of us who fall within this
group are also the ones that have the greatest opportunity to study and understand the situation.
Oh, well.
will make sustainability a real goal instead of something we all merely pay lip service to. The
current economic system is based on concepts of infinite growth and consumption, the
centralization of power, and ever-increasing activity levels. None of these is sustainable. While
the planet has much to offer in the way of resources, it cannot match the pace we have set for it.
Nor should we expect it to. Most of what we do is unnecessary. Like the ants in our little story,
we have designed a system for creating busy-ness. We are busily engaged moving dirt from one
pile to the next, all the while redistributing wealth and influence upward at the expense of the
Earth and its eco-systems and those who give their lives in the service of nothing.
In Canada, we used to be able to provide all of the food we needed for ourselves. Now
we have to import most of what we need. But that’s okay, because we are presently busy selling
all of our energy reserves for the price of a meal and a mortgage. That will probably do us for a
while, but what happens when we’ve sold all of the energy? We will be cold and hungry in the
dark and our financial “benefactors” will not be there to support us. Even if you don’t believe as
I do, that the care and maintenance of Mother Earth is a sacred trust, surely you will agree that
the foolishness we are presently engaged in cannot maintain without breaking. There are better
ways. They begin when we control the most essential common assets that we own - our financial
system and our governments. Without control of these, we cannot hope to have control of all of
the others.
Appendix 1
table 1a
Credit(debt), Business, Gov’t, and Personal (Stats Can., monetary authorities)
($billions) 2001 % of
Ttl
2005 % of
Ttl.
%chg. %/yr
*Business credit 852 32.5 1,008 32.7 18.3 4.58
*Consumer 648 24.7 915 29.7 41.0 10.25
Res.Mort 446 626 40.3 10.08
Credit 202 289 43 10.75
Consol. Gov.
Liab.
1,121 42.8 1,157 37.6 3.2 0.80
Total 2,620 100.0 3,080 100.0 17.5 4.38
(It is assumed that business credit does not include bank credit, specifically deposits. Bank deposits alone amount to over $1 trillion dollars for
2005.)
Notes on table 1a:
1. Although business credit has only increased by 18% overall, the long term debt portion of
this has increased by about 29%. Generally, this means that a larger portion of debt is
committed to interest bearing contracts. Short term liabilities tend to be discharged
sooner (by definition) and often do not bear interest (e.g. payables).
2. Total reported increase in credit (debt) amounts to $460 B, of which $267 B (58%) is
increase in consumer debt. Consumers are the only group which has substantially
increased their over-all share of the total debt load (24.7% to 29.7% of total debt).
3. Consumers have increased their debt by 41%.
*The above numbers are taken from Stats Can, monetary authorities. However, the table
that Stats Can released which covers personal assets and liabilities, “Assets and Debts
held by family units” (2005), shows the data in constant 2005 dollars. In other words, the
data from earlier years has been adjusted. In nominal (unadjusted) dollars, family unit
debt increased 66% ($458B to $760 B) from 1999 to 2005. (These figures are stated in
discontinued Stats. Can. reports.)
This raises the question of whether or not earlier year data has been adjusted for
other sectors or reports as well. If so, there was nothing indicated in the given
information. Queries to Stats. Can. on this matter have thus far been fruitless.
Reconciliation between data sources is a matter of concern with respect to accuracy. This
example is a case in point.
General note with respect to statistical methodology: The tendency of statisticians to
adjust for inflation or “eliminate the impact of widespread price changes” (Stats Can,
Wealth of Canadians, p. 39), does nothing to clarify real changes in relative wealth, in my
opinion. In fact, it serves to obscure the fact that individuals and families are losing
ground at an ever-increasing rate, not to mention the magnitude of the erosion of personal
wealth. Such practice does not “eliminate the impact of widespread price changes”, but
instead hides the full impact from our view. We pay our mortgages in nominal dollars. It
makes no sense to adjust the amounts we have paid so that they compare more favorably
with the current value of the dollar. For instance, if my mortgage was $200,000 in 1999,
what good does it do to adjust it to 2005 constant dollars, making it appear that the
mortgage was $250,000 or $300,000 or whatever? It was what it was. In this case at
least, the effect is to diminish the real changes in financial position.)
Statistics Canada discrepancies due to adjustments into “constant dollars” with respect to
personal assets and debt comparisons between 1999 and 2005:
Reference 1: composition of assets and debt, (etc...), excluding EPPs (employers pension plans), date modified
2005-01-12 (1999 unadjusted)
Reference 2: Assets and Debts Held by Family Units, date modified 2006-12-07 (1999 adjusted to 2005
constant dollars)
(Billions) Ref. 1 Ref.
2*
*2005
constant
dollars
Assets 2,900 3,950
Debt 458 515
Net worth 2,400 3,430
Ref. 1 excludes EPPs which amount to $680 billion for 1999 in 2005 constant
dollars on ref. 2 table. This should not change the debt figures.
Therefore, if ref. 2 data was modified to reflect constant 2005 dollars, then once
$680 billion is subtracted from assets and net worth, the % change should compare
consistently between the 3 sets of numbers.
Accounting for EPPs in 1999, the unadjusted values for that year would be:
(Billions) 1999 2005
Assets 3,400 5,620
Debt 458 760
Net worth 2,980 4,860
2005 figures remain in 2005 dollars.
By not adjusting the 1999 figures to 2005 constant dollars, we see that the real
changes in assets, debts, and net worth are considerably larger than is indicated by the
adjusted figures.
% change adjusted % change unadjusted
42% 65%
47% 66%
42% 63%
4. Over $3 Tr. of liability is a lot to fall on the shoulders of Canadian families.
($232,000/family unit.)
This is not all of the liabilities in the country. Stats. Can. “National Accounts, Liabilities”
shows $9.4 trillion in total liabilities for 2005, which is more than double the value of all
physical assets (barns, houses, cars, equipment, buildings, land, etc.) in the country.
If you use Stats Can.’s numbers for “fed. and prov. gov’t net debt, business debt
outstanding by supplier type, and personal debt”, we have close to $2 Tr. This is the least
amount of debt/liability that is interest bearing in the economy (+$150,000/fam unit that
bears interest). If you use the “national accounts” liability statement from Stats.Can., it
appears that $3.1 trillion is the amount of interest bearing debt in the country.
@ 5%, $2 Tr. ($150,000/family unit) would yield $100 B/yr in interest charges
($7,519/fam. unit/yr).
@5%, $3 Tr. ($225,000/family unit) would yield $155 B/yr in interest
($11,650/fam. unit/yr).
From Stats. Can. “National Accounts, Liabilities”, the “liabilities” number is $9.4
trillion dollars ($707,000/family unit).
Presumably, this number represents the sum total of all our financial obligations to one
another. It represents more than double the value of all non-financial (physical)
assets in the country. If physical assets (which includes land) represent the fruits of our
previous labours, then surely this number represents the amount of work which we are
obligated to do, but have not yet done! Each family unit has to produce $707,000 to
satisfy the whole of this obligation! That would be over and above what it takes to keep
us going now, right?
Yet, how can we be in such a position?
Do we need three times what we already have?
How long will it take to do all that work?
When we are done, will there be three times yet as much to do again?
If this work keeps piling up, will we ever pay the principal, let alone the interest?
I must have this all wrong, right?
The above calculation indicates the fact that all debt and interest is ultimately paid at the
consumer (personal) level in the same way that all taxes and other business and
government expenses are paid at that level (i.e. through taxes, interest, and prices). So as
debt loads continue to mount, pressure on family pocketbooks increases. Also, while
businesses tend to hold debt as a means to increase revenue, homeowners generally hold
debt as a means of financing shelter (the majority of personal debt is in mortgages), not as
an investment. A 40+% increase in debt might make business sense to a corporation, but
it represents a real threat to equity and security to the average homeowner. As indicated in
the unadjusted figures in the previous item, a 66% increase in debt would obviously be an
even greater threat.
Table 1b
Assets, Business, Gov’t, and Personal
(billions) 2000 2005 %chg. in
assets
%/yr %chg in
debt/yr
Business
**
3,641 *5,001
37.3
minus
banks
2,461 3,357 36.4 7.3 4.58
banks
only
*1,180 1,644 39.3
Gov’t 610 663 8.7 1.74 0.80
Financial 289 359 24.2
Business 321 *304 -17.0
Personal *3,771
5,623
49.1 9.7 10.25
Total 8,022
***11,287
(9,383)
40.7 8.08 4.38
*Due to the fact that the data timelines for the various sectors are staggered, these items are estimated from available information.
**Canadian and foreign controlled corporation assets less gov’t business assets.
***(See discussion below)
Table 1c
(from “the Wealth of Canadians,…” StatsCan research paper, 2005)
Distribution of Personal Assets 1999 2005
Pension and Financial Assets 41.3% 39.4%
Non-financial (real estate+) 48.5% 50.1%
Business 10.0% 10.5%
Table 1d
Asset distribution, All Family Units (from Wealth of Canadians,….2005)
2005 1999 (2005 constant dollars)
$ billion % $ billion %
Assets 5,623 100.0 3,948 100.0
Private pension assets 1,632 29.0 1,152 29.2
RRSPs / LIRAs / RRIFs/ other 593 10.5 472 11.9
EPPs 1,039 18.5 680 17.2
Financial assets, non pension: 585 10.4 487 12.3
Deposits in financial institutions 237 4.2 182 4.6
Mutual funds / invest.funds, etc. 134 2.4 91 2.3
Stocks 103 1.8 104 2.6
Bonds (saving and other) 35 0.6 29 0.7
Other financial assets 76 1.3 81 2.1
Non-financial assets 2,816 50.1 1,914 48.5
Principal residence 1,880 33.4 1,248 31.6
Other real estate 481 8.6 266 6.7
Vehicles 171 3.0 142 3.6
Other non-financial assets 285 5.1 258 6.5
Equity in business 590 10.5 395 10.0
Debt, All Family Units (from Wealth of Canadians,…,2005)
2005 1999 (2005 constant dollars)
$ billion % $ billion %
Debt 760 100.0 515 100.0
Mortgages 572 75.3 399 77.4
Principal residence 486 63.9 341 66.2
Other real estate 86 11.3 58 11.2
Lines of credit 68 9.0 29 5.7
Credit card and installment debt* 26 3.4 16 3.2
Student loans 20 2.6 17 3.3
Vehicle loans 46 6.1 33 6.3
Other debt 28 3.7 21 4.1
Net Worth 4,863 3,433
* Includes major credit cards and retail store cards, gasoline station cards, etc. Installment debt is the total amount owing on deferred
payment or installment plans where the purchased item is to be paid for over a period of time.
Notes on tables 1a-d:
1. Attention should be paid to the relative changes in direction of the debt loads and assets of
the major economic groups (percentages in bold font in table 4b). Businesses and
government are increasing assets twice as fast as debt.
2. Consumers, on the other hand, are increasing debt at a faster rate than assets, the only
economic group for which this is true. This is an indication that the flows of wealth are
transferring away from the intended beneficiaries of social institutions - the people.
3. 73% of consumer debt is in principal residence mortgages and lines of credit which are
secured by residential equity (Chart #3, Wealth of Canadians, StatsCan, 2005). Real estate
assets are shelters and not investments to the majority of consumers. Increases in (operating)
assets of businesses are predominantly as a result of productive business operations and
represent real growth in wealth. Increases in real estate prices may become realized as a
capital gain if the holding is sold, but as a primary residence it must be replaced and prices
therefore more appropriately reflect cost rather than a real increase in wealth. (For this
reason, it is more appropriate to compare changes in consumer debt to changes in average and
median incomes.)
Approximately 33% of all personal assets are in the principal residence (33% of $5.6 trillion=$1.85 trillion). If 73% of consumer debt is for
primary residences (73% of $780 billion=$570 billion), then the equity in all primary residences is $1.28 trillion (1.85-0.57). The
debt/equity ratio of consumer debt to primary residence value is (570/1280) 44.5%. This represents the average amount of debt secured by
primary residences in the whole country. However, only 55% of owners have mortgages on their homes (Statistics Canada, Wealth of
Canadians, table 8), which would bring the debt/equity ratio for the average homeowner with a mortgage to around 80% if the value of
unmortgaged homes is proportional to mortgaged homes.
4. 34% of personal assets (the majority of the above category of pensions and financial assets:
stocks, bonds, etc.) are controlled by banks and corporations. Therefore, a large part of
personal wealth (assets) is within the business assets (minus liabilities, net worth) shown
above (i.e. double counting). Because a significant portion of personal financial assets may be
in foreign securities, it would be difficult to say what percentage of all corporations operating
in Canada are owned and held within Canadian personal portfolios. However, 34% of $5.6
Trillion represents about $1.9 Tr. of corporate business assets in Canada (47.6% of corporate
business net worth!!!). On the other hand, does this mean that the other 52.4% is foreign,
privately owned? If not, who owns it? All ownership should end up in personal hands at
some point.
5. Because of point 4, $1.9 Tr. should probably be subtracted from the total of assets in table 4b
(double counting). This leaves a total asset value of $9.38 Tr. (***) in the measured Canadian
economy.
Statistics Canada, National Accounts shows a different picture for the country as a whole. In 2005, assets are $13.91 trillion, liabilities are
$9.4 T, and net worth is $4.51 T, which is $350 billion less than total personal net worth (?). There are probably good reasons why the
numbers from various sources do not reconcile, but I’m not sure what they are. One example that may explain some of the apparent
discrepancy in total asset values, for instance, might have to do with assets that are held in trusts and so may not show up in personal,
government, or corporate balance sheets. This might also explain who a lot of the money is owed to.
6. Using the total asset value in the measured Canadian economy as calculated in point 5, we
have the following ratios for the country as a whole:
Debt/Assets = 3.08/9.38 = 33%
Debt/Equity = 3.08/6.28 = 49%
If we use the “national accounts” figures, we have:
Debt/Assets = 3.08/13.9 = 22%
If we consider all liabilities as debt, we have:
Liabilities/Assets = 9.4/13.9 = 68%
Liabilities/Net Worth = 9.4/4.5 = 209%
7. Only 10% of total personal assets are in (small?) business enterprises (the “engine of the
economy”?). The majority of these businesses have no pension plan for their employees.
8. It is worth noting the large proportion of total business assets that are held by banks (33% of
all corporate assets, 14.6% of all assets measured in the Canadian economy, 2005, depending
on which report you read). The vast majority of bank assets are reportedly loans, or financial
obligations of other members of the community to the banks which are secured by the assets
of those members. (If a quarter to a third or more of the assets in the economy are under some
interest bearing debt obligation, banks, of which there are only a handful in this country, may
be likened to the landlords of the country.)
9. The significance of these relative numbers becomes increasingly relevant to the issues of
wealth and risk distribution in the economy.
Appendix 2
All Canadian and foreign controlled corporations*, assets, revenue, and profit.
2000 2001 2002 2003 2004 AVG
($billions)
Total Cdn +Gov’t
Assets 3,128 3,239 3,380 3,573 3,911
Operating revenue 1,609 1,672 1,713 1,767 1,869
Operating profit 133 119 121 133 149
Profit, % of Rev. 8.27 7.12 7.06 7.52 7.97 7.59
Profit, % of Assets 4.25 3.67 3.57 3.72 3.81 3.80
Private Cdn corps.
Assets 2,807 2,896 3,028 3,221 3,550 %chg=26
Operating revenue 1,524 1,583 1,627 1,677 1,766
Operating profit 106 93 95 105 126
Profit, % of Rev. 6.95 5.87 5.84 6.26 7.13 6.41
Profit, % of Assets 3.78 3.21 3.14 3.26 3.55 3.39
Gov’t business
Assets 321 342 352 352 360 %chg=12
Operating rev. 85 88 86 89 102
Operating profit 28 25 25 27 23
Profit, % of Rev. 32.94 28.41 29.07 30.34 22.56 28.66
Profit, % of Assets 8.72 7.31 7.10 7.67 6.39 7.24
U.S. controlled
Assets 496 610 637 622 666 %chg=34
Operating rev. 454 483 469 472 499
Operating profit 40 34 31 36 44
Profit, % of Rev. 8.8 7.0 6.6 7.6 8.8 7.8
Profit, % of Assets 8.0 5.6 4.9 5.8 6.6 6.2
E.U. controlled
Assets 248 258 262 282 317 %chg=28
Operating rev. 159 156 156 179 191
Operating profit 12.5 12 12.7 14 17
Profit, % of Rev. 7.8 7.8 8.1 7.8 8.9 8.1
Profit, % of Assets 5.0 4.7 4.8 5.0 5.4 5.0
source: Statistics Canada (*2001-2005 data taken from current updated data, 2008. 2000 data taken from 2007
version)
Notes on foreign ownership in Canada:
(derived from StatsCan source, corporate returns data, 2004 last reported year for this data)
1. 23% of private sector business is foreign owned in Canada.
2. 13% of all business assets are U.S controlled.
3. 6% of business assets in Canada are government assets.
4. By order of profitability as measured by gross margin (“profit, % of rev.”, 5 yr. averages):
Government > European Union > U.S. > Cdn. Private Sector
28.66% 8.1% 7.8% 6.4%
Returns on revenue, or gross margins, are markedly different in favour of foreign and government enterprises. This seems to
suggest that foreign companies have some business advantage over Canadian, but may just be due to the fact that foreign companies
are only likely to take over the more profitable of those available for sale, merger, etc. Government advantages are probably due to a
monopoly service or market. In any case, these gov’t margins are revenues which go to general revenues in the interests of the public.
There are issues of privatization and taxation here, but much more analysis and information is required before drawing conclusions.
5. By order of efficiency as measured by return on assets (“profit, % of assets”):
Government > U.S. > E.U. > Cdn. Private Sector
7.2% 6.2% 5.0% 3.4%
If Canadian banks are taken out of the Cdn. data, the Cdn. figure goes to 5.5%, ahead of the EU. This is due to the fact
that, in 2004, banks owned ~ 40% of all business assets in Canada. In 2004, Canadian banks made 21 of the 129 billion in
Canadian private sector profits, or over 16% of all Can. Corp. Profits.
Returns on assets again show an advantage for foreign companies and government, in particular for the U.S. after adjusting
for the portion of Canadian companies that are banks.
6. In 2004, $68 billion profit was made by foreign companies in Canada, owning 21.4% ($1,090 B) of business assets.
This is compared to $129 billion for Canadian companies owning 72% ($3,585 B) of business assets.
2004 return on assets foreign % Canadian % fgn/Cdn
68/1,090 6.2 129/3,585 3.6 172%
7. The above indicates that foreign owned companies in Canada are 172% more profitable than Canadian owned companies on a return
on assets basis.
8. There seems to be an order of economic advantage in favour of government and foreign companies as compared to Canadian owned
companies.
Order of Advantage? Gov’t > Foreign > Cdn
Ratio of fgn/Cdn earnings 68/129 = .53
Ratio of fgn/Cdn assets 1090/3585 = .30
Ratio of fgn/Cdn profits 6.2/3.4 = 1.72
Ratio of gov’t/Cdn profits 7.2/3.4 = 2.12
9. In terms of ownership, it seems that foreign share of assets is growing faster than Canadian assets.
From the above chart, we show the 5 year change in assets as (“%chg=” )
U.S > E.U. > Cdn > Gov’t
34% 28% 26% 12%
Inflation is not accounted for in the nominal values, but the relative changes are valid as shown for comparative purposes.
The profit advantage of foreign corporations to Canadian is showing up in the asset growth disparities. A compounding effect of this
condition, if it should continue, is a recipe for the eventual transfer of Canadian business to U.S. and foreign interests. The only
businesses left in Canadian hands will be the ones nobody else wants.
Appendix 3
Of the total amount of per capita revenue ($18,834), all but $2,033 goes to levels above the local gov’ts. $508/cap is the amount that comes
back from higher levels to be used locally.
This gives: $2,033/cap for use at the local level
$16,801/cap for use at higher levels
Notes on appendix 3:
1. From: “federal general government revenue and expenditures” (2005) (StatsCan)
2. Alberta annual report (2006)
3. Municipal financial statements (2003-2005)
4. calculated
5. From: “federal general government revenue and expenditures” (2005) (StatsCan)
6. Alberta annual report (2006)
7. (*) Local governments in this case are the city of Cold Lake, the town of Bonnyville, and the M.D. of Bonnyville. Numbers are
consolidated in the above table for the purposes of this report.
“Effective regional-wide governance is needed because of the current fiscal system . . . .since 1992, provincial transfers as a percentage
of total revenue to Alberta municipalities has decreased from 22% to 11%. Furthermore, since 1992, there has been a change in the composition
of grants given to municipalities, The Province essentially has eliminated unconditional grants in favour of project specific grants. In 1992 the
provincial transfers consisted of 15% conditional grants and 7% unconditional grants. In 2005, provincial transfers consisted of 11% conditional
grants and 0.3% unconditional grants.
As a result of the reduced reliance of provincial transfers, municipalities have increasingly relied upon property taxes to make up for the loss in
revenue from provincial transfers. In 1988, revenue from provincial transfers and property taxes were nearly identical, however in 2005, property
taxes increased to 29% of municipal revenue, while provincial transfers decreased to 11%.”
(from Regional Government vs. Governance, Austrom Consulting, for the municipalities of Cold Lake, Bonnyville, and the M.D. of Bonnyville)
Comparison of revenue and transfer flows between government levels.
(2005) Gross($mill.) per Capita
1. Federal Revenue $212,000 $ 6,516 (minus Prov. and local)
2. Alberta Revenue $ 36,000 $10,285
3. Local g’ovt* $ 61 $ 2,033
4. Total per capita revenue $ 18,834
5. Federal transfers to Alberta $ 3,391 $ 969
6. Alberta transfers to local g’ovt* $ 15 $ 508
Appendix 4
Oil, Oilsands, and Gas Revenue, AB
(The following is from the Alberta energy. gov’t website. Note the approach of the writer. From
my point of view, it is incongruous that this presentation is accepted as an adequate justification
for the royalty regime. The presentation is from the oil industry, but is found in a government
document without counterpoint presentations. It seems to me as if the government is only too
willing to take their cues as to public interest from those who represent industry rather than the
public at large. This is strictly a personal observation and is certainly open to question, however.)
The current royalty features have 3 main objectives:
1. To extend the economic life of mature pools to maximize recovery of oil reserves;
2. To promote the development of new and more efficient technologies; and
3. To promote the exploration and development of new reserves while providing the province
with a fair share of the value of the resource.”
“• What’s the real question?
– It’s not a question of cashflow; the challenge is allocating it to ensure economic, social and environmental sustainability.”
(CAPP, Stringham presentation, Sept. 18, 2006, on royalty regimes: “Does Alberta need a new royalty regime?”)
“Two part oil sands royalty system
1.Upfront bidding for access to the resource
Open market bidding process
Highest bidder earns right for 15 years
Acts as “economic rent” shock absorber
2. Net profits royalty (resource rent)
75/25% sharing of revenue minus costs
guaranteed minimum (1% of production) even when no profit
Allows for recovery of capital costs
Automatically adjust for prices and costs
Must examine over entire project life (project royalty)”
“As of September 2006, 33 of the 65 oil sands projects under the generic regime are in post payout (25%).” (CAPP, Stringham presentation,
Sept. 18, 2006, on royalty regimes: “Does Alberta need a new royalty regime?”)
“Conclusions (of the CAPP study)
• Does Alberta need a new royalty regime?
The royalty regimes are working as they were designed to.
They are internationally competitive.
With recent multi-billion provincial surpluses, there’s not a lack of money.
There is a need for a better awareness by Albertans of royalties.
• All aspects need to be considered:
Royalties +Lease Bids +Taxes =Government Take
Principles: Competitive, Risk Balanced, Simple, Robust, Stable and Clear
• What’s the real question?
How should the government allocate their large surpluses to ensure
that Alberta remains economically, socially and environmentally
sustainable?”
(Author’s note: To whom is this the real question? Who decides? From my point of view, the real question pertains to
rightful ownership and responsibility.)
(CAPP, Stringham presentation, Sept. 18, 2006, on royalty regimes: “Does Alberta need a new royalty regime?”)
Table 4a
(from Alberta Energy, About Royalties)total (royalty) revenue collected
avg chg/yr
2005/06 $14.347 billion 2003/04 $8.046 billion 39%
Oil royalty revenue amounted to:
2005/06 $1.463 billion 2003/04 $981 million 24.6%
Natural Gas and by-product royalty revenue amounted to:
2005/06 $8.388 billion 2003/04 $5.450 billion 27.0%
Oil sands royalty revenue amounted to:
2005/06 $ 950 million 2003/04 $197 million 191%
Remainder of the total is coal, crown leases, rent, and freehold mineral tax.
“Every US$1 rise in WTI oil price is equivalent to $123 million in budget revenues.” (About Royalties, Alberta Energy)
The above statement assumes a constant exchange rate between US and Canadian dollars. It also does not differentiate between qualities of oil. It may refer strictly to conventional oil. An increase in “budget revenues” implies that any positive gain in revenues that may be attributed to an increase in oil prices would be included. This is not a direct reference to the proportion of new prices that would accrue to government revenues, but would include indirect gains which may or may not be as a result of a rise in the price of oil (e.g. increases in taxes due to increase in general economic activity). One might wonder why a more direct contribution as a share in price gains would not be stated.
Table 4b
CERI media report, 2003 (centreforenergy.com/documents/295.pdf)
Bitumen Supply Costs plant gate WTI@ Cushing,Oklahoma
Cold Lake Primary C$ 14.51 US$ 21.57
Cold Lake CSS C$ 17.77 US$ 25.12
Athabaska SAGD C$ 15.64 US$ 25.10
Athabaska mining C$ 15.48 US$ 24.97
For this study supply costs:
• Are calculated in constant 2003 dollars
• Assume a 10% ROI (return on investment, real)
• In other words, SC(supply cost) is the price the project owner would have to receive in $/barrel to cover all costs and earn an adequate return on investment.”( CERI media report, 2003 )
Current production (2006) in the Cold Lake area (Imperial, Encana, CNRL, Shell) is @ 325,000-350,000 b/d. When new production comes onstream within the next year or so (writing in 2006), production will be significantly higher.
2005 Statistics (from CAPP, industry facts and information, oil sands, except * which represents a benchmark avg. oil
price for the respective year)
1998 2001 2005 %chg,98-05 %chg,01-05
Cap. spending(Bil.) 1.5 5.9 10.4 593 76
Royalties 0.4 0.2 1.0 150 400
Reserves (mb)
Mining 2847 4919 6125 115 24.5
Bitumen 1388 1820 2474 78 36
Production(mb/d)
Mining 308 349 383 24.3 9.7
Bitumen 282 310 609 116 96
Upgrader cap (mb/d) 405 578 733 76.6 26.8
Industry rev. ($B/yr) 3.1 6.9 17.7 470 156
*Price (US$, cl, NYMEX) 25 55 120
Table 4d
Oil Sands provided 35% of Canada’s “crude oil” production in 2003
Mb/d %
Conventional Light 918 36.8
Condensate 163 6.5
Conventional Heavy 543 21.7
Unprocessed Crude Bitumen 347 13.9
Synthetic Crude Oil 527 21.1
Total 2,498 100.0
(CERI report to media, 2003)
1.64 mb/d for Alberta, 874,000 b/d of oil sands production (calc. From table 4d.)
CAPP puts industry revenue for Alberta at $81.5B for 2005. If $17.7B was for oil sands production, that would mean that revenues for other oil and gas sources was $64B.
Table 4e
Global Upstream Performance Review (2005, Hargrove)
Worldwide - all oil companies, oil and oil equivalent [o.e.] producers.
From this summary, it is clear that the world oil business is doing very well.
Over the 20-year study period, CERI estimates the total government revenues at $123 billion
% of Revenue
Total revenue (billions) 500
Pre-tax Income 277 55
Net Income 138 28
Taxes 138 28
Cash Flow 240 48
Total Costs Incurred 195 39
Dividends 88 17
Buy-backs 49 10
The following table summary of the oil and gas industry is from the CAPP website.
Table 4f
Note: All currencies are in Canadian dollars unless stated otherwise. * references those numbers not yet available. ** Estimates Alberta.
1998 1999 2000 2001 2002 2003 2004 2005
Capital Spending ($ billions)
Conventional 10.4 8.5 12.9 14.7 11.7 15.5 18.5 24.9
Oil Sands 1.6 2.5 4.3 5.9 6.7 5.0 6.2 10.4
Total 11.9 11.0 17.2 20.6 18.4 20.5 24.7 35.3
Fiscal year 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06
Payments to province ($ billions, 2.6 4.8 10.6 6.0 7.1 7.7 9.7 14.3
royalties, fees & bonuses)
Wells Drilled
Oil 1,391 1,751 3,198 2,558 2,645 3,022 2,563 3,221
Gas 4,033 5,622 7,353 8,789 6,949 9,942 12,276 13,268
Total (incl. Dry & Service) 8,175 9,444 13,543 14,975 12,989 17,873 19,365 21,599
Reserves at year-end
Conventional oil (million barrels) 2,215 2,148 2,079 1,947 1,921 1,753 1,741 1,704
Oil Sands:
Mining-Integrated Synthetic (mill. barrels)
2,847 5,034 5,011 4,919 4,881 5,213 5,294 6,125
Raw In-situ Bitumen (million barrels)
1,388 1,561 1,805 1,820 2,024 2,032 2,082 2,474
Natural Gas (trillion cubic feet) 47.8 46.6 44.8 45.2 44.5 42.5 41.7 40.9
Production:
Conventional oil (,000 b/d) 858 785 748 720 661 629 600 571
Mining-Integrated Synthetic (,000 b/d)
308 324 320 349 441 429 462 383
In-situ Bitumen (,000 b/d) 282 244 289 310 303 435 532 609
Pentanes plus/condensate (,000 b/d)
200 197 185 166 161 148 146 145
Crude oil & equivalents (,000 barrels/d)
1,649 1,550 1,541 1,544 1,566 1,640 1,740 1,709
(Cont’d) Fiscal year 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06
Natural Gas (billion cubic feet/d) 13.3 13.7 13.8 13.6 13.4 13.1 13.2 13.3
Industry Revenues ($ billions) 21.1 28.8 49.9 49.3 42.9 57.2 64.4 81.5
Employment
Direct & Indirect 174,150 178,200 183,000 183,000 183,000 275,000 275,000 275,000
Exports:
Crude oil - volume (thousand barrels/d)
957 886 931 1006 983 1,016 1,105 1,093
Natural Gas (billion cubic feet/d) 7.6 8.2 8.5 8.9 8.9 8.4 8.5 7.1
Consumption:
Crude oil & Products (thousand barrels/d) 250 244 231 246 263 272
Natural Gas (billion cubic feet/d) 2.2 2.0 2.1 2.3 2.3 2.2
Appendix 5
compensations for services rendered through organizational structures that have been commissioned in the interests of the common good.
Conclusion
In conclusion, and in the interest of maximal clarification, there are no pre-existing laws or documents which confer authority to you if they do not include my explicit agreement. No “laws of the land” stand above my rights as a free being who exists by the will of my Creator.
No “legal” definition, device or “constitution”, nor any form of coercion, whether violent or subtle, which you may employ in an attempt to deny this essential truth will make the truth false. No coincidence in the usage of words which I have employed with those which may have some or many “legal” meanings may be used to confuse or alter the meaning of this declaration which should be clear to any reasonable human being who is literate and conversant in this language. As I have indicated, I am not entering into a contract with you as such, though I have referred to the existence of contracts which you have implied throughout our relationship as having authority and effect. I merely intend to communicate and make clear my rights as a sovereign being and offer you the opportunity to consider remedies in favour of full recognition of my status, and yours I might add, as a sovereign being.
I, being called --------------------------------------------, am of sound mind and body and, in full recognition of my
existence and rights as an Extension of my Creator, do hereby solemnly make this declaration.