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What Banks are Really Doing Parts 1 -5

Rance Foulston

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PART 1

 
Introductory Excerpt:
 
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.

 
EACH PARTY MUST GIVE MORE TO GET LESS.

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

 
-----------------------
 
From:  Verne Warwick
 
Hello Folks;
 
After having written the book "Clear Money" as a Primer on the UMS (Usury Monetary System) in 2003, and given seminars in North and South America and eastern Europe on the Problem and its Solution; I have recently received one of the best treatises on the subject from Rance, a fellow who really gets it!
 
Please take the time, over whatever period it requires, to peruse his work.
 
I think you will find it a worthwhile read!
 
Regards
Verne Warwick, P.Eng.
 
 

From: Rfoulston <rfoulston@worldpost.ca>

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

Cold Lake, Washington
 
------------------------------------
 
What Banks are Really Doing
 
by Rance Foulston
 
Part One
 
Introduction (October 13, 2008)

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

freedom, universal equality, and abundance for all.

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?

*************************************************************************
What Banks are Really Doing    (Part 2)
by Rance Foulston
 
Money as a commodity

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.

 
EACH PARTY MUST GIVE MORE TO GET LESS.

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.

In effect, untold multiple third parties have altered the value of the agreement after the

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?

As currency trades at fluctuating values as determined by the market driven(?) rate of

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).

What Banks are Really Doing   (Part 3)
by Rance Foulston 
 
Private lending

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%

******************************************************
What Banks are Really Doing  (Part 4)
by Rance Foulston 
 
 
Effects of the Stock Market System on Local Economies

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.

It is my hope that, should we choose to accept change, it will lead us in a direction which

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).

***************************************************************
What Banks are Really Doing   (Part 5)
by Rance Foulston 
 
 
For the sake of perspective:

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.

Cold Lake Area

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

“Supply Cost is the constant dollar price needed to recover all capital expenditures, operating costs, royalties and taxes and earn a specified return on investment.

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 )

A chart in the above document plots IRR (internal rate of return) vs. WTI price. Real rates of return appear to be in the 23% (CSS and SAGD) range @US$ 32/b, assuming shipment to Oklahoma upgrader. The projection implies (if extrapolated along the return curve) that if prices were in the US$ 60 range, gross margin would be in the 40% range.
The difference between plant gate and WTI prices takes into account “transportation costs to market and the value of the bitumen in the market having regard for its high sulphur content and low API gravity.” For example, for Cold Lake Primary, the difference would be: US$21.57 x $1.35(2004 avg.) = C$29.11. 29.11-14.51=14.61. C$14.61 (less some profit component) would be the cost of shipping and upgrading. (author’s calculations and presumptions.) In 2003, at the time of this report, the cost of upgrading was estimated to be C$12.71/b.

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.

In the 2005-2006 year, oil prices were averaging around US $60/b or C$73. Reportedly, bitumen was sold at an average of one-half of WTI price in 2004 (CAPP), or at US$22 (C$29.7). For 2005, at one half of WTI, $C36.5, production value in the Cold Lake area is between C$4.3 and C$4.7 billion. At 40% margin, this represents between C$1.72B and C$1.88B in profit. Considering that the average price of oil sands production was C$49 and that margins worldwide are in the +50% range (Hargrove, 2004), this would be a very conservative estimate.
Within the operating expenses of the producers, a considerable amount is generated in the earnings of supplier/contractor firms, but no statistics were available on this score. (A calculated guess at the gross margins on this amount would be ~ $0.75-1.0 B, a sizable portion of which would be earned in the local area as opposed to in the broader economy. How much would end up in the community rather than merely passing through the hands of local suppliers and moving on to non-local investments? This number represents a gross profit estimate, not expenses. Expenses may be somewhat distributed among local families, but it is unlikely that a substantial amount of this “gravy” would end up in local hands.)
Table 4c

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)

Notes of interest to supplement the above Alberta oil/gas industry information:
1. Table 4d. indicates total oil production of 2.5m b/d in 2003 for all of Canada. CAPP shows

1.64 mb/d for Alberta, 874,000 b/d of oil sands production (calc. From table 4d.)

2. 2004 oil sands production in Alberta was estimated to be 992,000 b/d (a 13.5% increase over the 2003).
3. Total crude oil and equivalent production in Alberta for 2004 was ~1.74m b/d (CAPP).
4. “In 2005 Alberta's oil sands were the source of about 58 per cent of the province's total crude oil and equivalent production.” (Alberta Energy, oil sands) CAPP 2005 statistics for Alberta indicates 1.71 mb/d in crude and equivalent production. Table 2b shows 992,000 b/d for oil sands.
5. Natural gas sold was ~ 5 trillion cf, between $28 B and $38 B in gross value. Estimated gas reserves are in the 40.9 tcf range (CAPP, in Alberta, 2005). Although we seem to add to reserves every year, we are using more than our rate of finding or replenishment. Last year, we used 5 tcf or almost 12% of known reserves. The CERI report above estimated a per day natural gas requirement (for bitumen production) of 1 billion cf/d (currently 7% of total sales) in 2005 growing to 3.5 billion cf/d in 2017 (~250% increase). We are currently exporting ~1/2 of our N.G. production. NAFTA has us committed to an increasing demand and a diminishing resource.
6. Total royalties collected for the above resources (bitumen, conventional oil, natural gas, 2005) amounts to approx. $10B.
7. Gross total value, 2005 (based on reported revenue and production figures):

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.

8.

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.

9. Industry report in table 2b reports revenue of $17.7 billion for the oil sands business in 2005. Using the production figures from this table (992,000 b/d), this is an average price of C$48.88/b in 2005 when the average WTI price was ~C$68. The difference is presumably due to the mix of prices and sales levels for bitumen and mined oil sands between raw bitumen and upgraded production. In 2003, at the time of the CERI media report, the cost of upgrading was estimated to be C$12.71/b.
10. “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

% 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

 
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, over a 20 year period between 1985 and 2005, would be ~1-2% of total consolidated government revenue.  The following is an excerpt from a letter to the Edmonton journal sent on Feb. 7, 2007, which speaks directly to this issue (I don’t believe the letter made into print.):
“According to the Canadian Association of Petroleum Producers (CAPP), Stringham presentation, Sept. 18, 2006, on royalty regimes (“Does Alberta need a new royalty regime?”), the province will (eventually) collect 25% of net revenue in royalties and a further 10% in taxes, for a total of 35% of net revenue.
According to the Global Upstream Performance Review (Hargrove, 2005) world-wide summary of the upstream energy business, (oil revenue) taxes are, on average, 50% of pre-tax income. Assuming that Alberta oil companies achieve the same gross margins as the rest of the world, their pre-tax income (net revenue?) would be in the neighborhood of $45 billion (total 2005 Alberta industry revenue = C$81.5B, CAPP). At 35% of net income, the province’s share of this would be $15.75B .
In 2005, Alberta collected a total of $16.8B from all sources, $7B in income taxes from all (personal and corporate) taxpayers in Alberta, $9.74B in resource revenue, inclusive of royalties and leases, etc. According to Stringham (CAPP), the province should have received ~$4.5B (10% of pre-tax income) in taxes from the oil companies alone.
The Consolidated Statements of the Province of Alberta, year ended Mar. 31, 2006 states that (of the total income tax for the year 2005, $7.013B) $2.364B was corporate tax. That’s for all corporate businesses in the province. If none of the other corporate business entities paid income tax, and the oil industry paid all of the reported corporate tax in Alberta for 2005 (i.e. none of the other corporations are profitable), they would still have only paid ~5% of pre-tax income!
Incidentally, for 2006, total provincial personal tax increased by 29% over 2005, while corporate tax decreased by 33%. Corporate tax is now (2006) down to ~$1.6B. In 2006 (industry revenue = $106B), if the industry had paid all of 2006 corporate tax, they would have only paid 2.7% of pre-tax income!”

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

The following declaration 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 somehow 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 dis-empowered 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.
Declaration of Sovereignty
Let it henceforth be understood, in particular by any and all who would make a claim against me that is not substantiated by my agreement in writing as to the validity of the claim: I am a Creation of the Supreme Source, which I believe to be LOVE. As such, I believe my existence to be an intentional expression of this Source and that, as such, I am an Extension of Love Itself.  While I express in this life as a finite being within a physical embodiment, I am not a body.
 
Having the same nature as my Creator, I am free to extend and express according to my will, in keeping with the intrinsic nature of all existence, to be in harmony with all Expressions of Source in recognition of our essential condition as One, a logical imperative of the idea that extensions are not separate from their source.
Therefore, I am here as an Expression of my own will and as an Extension of the Will of my Creator. I am free, and as such, I do not recognize any pre-existing social claims against my Spirit, my body, or my property. All claims of any kind that deny me this essential condition cannot be valid without my consent, which is to be represented by my signature on any relevant documents which would state the claim.
Being a free and sovereign entity, I declare my right to enter into any agreements or relationships (exchanges) which are of mutual benefit, and therefore harmonious in their intent. I do not recognize any right claimed by third parties who are not included in the exchange, whatever documents, laws, or contrivances they may present which declare the contrary, if my written consent is not present on said document, law or contrivance.
My agreement to comply with the conditions of any claim presented, which may be implied by my actions subsequent or prior to the presentation of any claim which lacks said signature, is not to be construed as my acceptance of this document or claim as valid. I take it as my right to honour agreements which may not be authorized by my signature, though it is not my obligation to do so.
No law presented to refute these rights are valid, for the same reasons; namely, that I am not a signatory to them, and they therefore have no power or authority over me, since such power and authority is mine alone to give and will generally be evidenced and given effect by my signature.
The above described declaration is completely consistent with previously conceived and upheld principles of common law. While those principles do not seem to be in effect in our current social arrangements, they are not subject to negation by any man-made laws as they derive directly from our status as free beings, Extensions of Creator with every right and ability given as direct intention of this Creator to express as such. The continuing existence of documentation which describes the principles of common law is therefore not essential to the understanding and application of such laws. I have never seen a document which contains them, but I am sure of their intended power and meaning.
Any concepts relating to freedom, such as freedom of speech, freedom of religion, freedom of thought and deed, freedom of assembly, etc. do not arise independently of one another through the largesse or fancy of social structure. They arise and derive expressly out of our understanding of the appropriate nature of common law as divine and essential to the expression of humanity as the will of Love.
I am now cognizant of the fact that all laws or statutes which subdue or violate principles of common law, such principles having a reasonable basis in our understanding of our true natures and equal status, are essentially not in my interest nor in the interests of any sovereign being. Therefore, claims against myself or my property, which arise out of said laws or statutes and have not been given authority by me, will not be recognized as valid. Such claims are generally in their essence claims of a commercial nature and as such are taken by me to be contractual, subject to the terms and conditions of contract as mutually agreed by the parties to the agreement, and authorized by signatures to that effect.
All previous payments or efforts imparted by me in the service of a claim which was not expressly authorized by my signature, or which may have my signature, but such signature was obtained out of my misinformed belief as to the purpose of said signature, I now consider to have been inappropriately solicited and enforced, and I further now claim that a substantial debt has been accumulated in my favour. This claim may be presented by me at some time in the future. However, any failure on my part to present this claim is not to be construed as a tacit agreement or compliance with the claim which resulted in my payment. On this matter, you will be notified at my leisure since it is my claim against you which is in effect. Therefore, I do not recognize limitations of time duration as to the validity of this claim.
Any delays on my part to notify you or update you as to my intentions or claims, or to act in strict accordance with my known rights, you may take to be a period of grace which I extend to you in the interests of mutual benefit. I intend no harm to anyone by this declaration, nor do I favour chaos over harmony. It is in the interests of all sovereign beings as Extensions of Creator to strive for harmony in recognition of our essential unity. Therefore, it is my compassionate intention and advice that you use any delays fruitfully in the pursuit of reason and remedy towards our mutual benefit as sovereign brothers and sisters and in honour of our essential natures.
Any subsequent claim which you may make against me may be ignored without notice by me unless it meets the conditions of a mutually agreed upon contract and all that that entails, not the least of which would include my signature on the contract. Any subsequent claim which you may make against me, but that may be legitimate and meet the conditions of a mutually agreed contract, may be taken into account and applied against any outstanding claim(s) that I may have against you.
I will accept arbitration on disagreements of any kind or for any offense between myself and any declared sovereign being(s) if and only if presided and judged in that capacity by a number not less than twelve of my peers, who are also sovereign by their own declaration. If they are not so declared, I cannot recognize or agree with any stated authority they may claim, as it does not derive from our status as equal sovereign beings, but from some other status or authority which implies that they are acting in the capacity as agents of an authority which I do not recognize.
Their declaration, therefore, must be as solemn as my own, and their intent, as evidenced by their consistent application of sovereign principles, must be in clear keeping with those principles.
Limits as to the Use of my Name
I further state that my name is -----------------------------------------------, most commonly referred to by friends and family as --------------------. I now give notice that this name was given to me by my biological parents and I choose to retain this name as mine to use in whatever way pleases me. I may use this name or any part of this name or any combination of the parts of this name in any way that I choose. I do not give you permission to use it freely, in particular in any way which would confer a financial benefit to yourselves or third parties, and in general for any reason except as is necessary to identify me. You may use it in correspondence and in reference to any legal contract to which we are both in agreement and to which appropriate signatures have been affixed.
This name is mine. It is my property in the same way that my body is my property, and as such is not to be violated, nor exploited in any way that I do not agree to by contract. Any documents or laws which you may believe give you a right or legitimate claim with respect to this name will not be recognized as being valid. No registrations or other documents which would seek to limit my freedom or make a claim of ownership of my Spirit, body, property, or name will be recognized for all of the reasons herein stated.
Though I own this name, I am not my name. Therefore, I may call myself by any name I choose. Limits as to Organizational Authority
You and all of your agents which you deem to have authority, are hereby notified that any authority you or they may think or claim to have over me is not recognized by me.
All authority flows from my sovereign rights and those of my brothers and sisters due to our essential equality. Therefore, any authority you may claim cannot exist except in recognition of your position as a servant in service to the common good of your sovereign brothers and sisters. You receive your daily

compensations for services rendered through organizational structures that have been commissioned in the interests of the common good.

These commissions have no power to overturn, usurp, or otherwise subdue the power and authority of sovereign individuals except by explicit agreement between all affected sovereign entities. These organizations and commissions can only exist by the authority granted by sovereign beings for the purpose of delivering value and service in their common interest and by their explicit agreement. Complications which arise out of the full recognition of this fact are immaterial to the essential truth of it and do not offer acceptable excuses for the failure to recognize it.
Any organization which does not recognize the source of its existence and purpose in the service of sovereign beings may be thought of as unlawful. The remedy is to merely re-establish their direction according to this understanding. The full realization of the scope of this task may be daunting, but principles of sovereignty are non-negotiable.
Since the rights of sovereign beings are inviolable by definition, your duty is to uphold this principle in the execution of your service to the sovereign beings who collectively give authority to organizations in their service. Organizations or individuals acting contrary to this understanding of essential equality between sovereign beings have no authority and may be thought of as unlawful.
 
As to Clarification
From time to time, I may consider it appropriate to notify you with an addendum to this statement, which will further clarify the limits of our relationship. In other words, this declaration may not be all inclusive. That is not my intent, however. I intend to be as clear as possible in this matter. Notwithstanding the possibility of an incomplete understanding or communication, you may take this declaration as my notice with respect to all of our previous, present and future affairs. Any reply you may wish to make will be accepted in writing, with your signature, provided you have the authority you must claim in making it.
My rights are not created by this document. Also, by this time, you should fully understand me when I assert that they are not created by any documents of yours. They arise out of my essential nature. Therefore, while this document is descriptive in terms of my assertions with respect to our relationship, it is not a negotiable contract. As such, your approval or acceptance is not requested or required. Your reply, should you make one, will be taken as notice that you have received my statement and will act according to your duties in service to myself and the collective of sovereign beings of which you are also a part.
Failure on your part to reply in said manner will be taken either as your tacit agreement that you understand my meaning and intent and will act accordingly, or that you in fact have no authority with which to reply. In the latter case, I expect you as an agent of authority to pass along this message to those who may have such authority. It goes without saying that appropriate documentation and signatures which verify this authority must accompany your reply. Of course, that would include my signature as a willing party to the agreement you present which proves authority.

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.

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