Per a graphic published by the World Economic Forum, 18% of U.S. households earn less than $25,000 a year, 18% earn more than $150,000 a year, and the rest fall in between.
This is as reported about a year ago. A couple of years earlier, Pew Research put it a different way: 19% of U.S. adults are “upper income,” 52% are “middle income” and 29% are “lower income.”
For some reason, IQ is plotted on a “bell curve.” I assume this is based on measurements, but it may not be. Per one rendition of this curve, 68% of people score between 85 and 115, with 16% higher and 16% lower. If you take IQs from 90 to 110, you get closer to 50% of the population.
Real skill or survival ability is difficult to measure. IQ is a theoretical measure, and income is a material measure, and they don’t necessarily correlate, though some studies indicate that in the aggregate IQ and “well-being” correlate rather well. In individuals, maybe not so much.
My point in reviewing the above numbers is that the majority of people, by many measures, are “in the middle.” They are better off than the worst of us, but nowhere near where they wish they were. Thus, in a democracy where the majority rules, you would expect “mediocrity” to also rule. This is not, however, what a company, a country or any group of people need to survive well. They need to be exceptional to survive well, or at least choose leaders who are exceptional. But how can you expect “average” people to pick “exceptional” leaders?
This is a very old problem that was raised by people like Plato, long before they had the Bureau of the Census, Pew Research, or other groups working to compile hard data on these questions.
Sam Bankman-Fried, per most measures, was an exceptional person. So were his parents, both professors and Stanford University. Yet he allowed his company to go bankrupt by, reportedly, making very stupid ethical and financial decisions regarding how to use his investors’ money. Was SBF really an exceptional criminal? Or maybe really just a bit of a dullard, like most of us?
I was lying down contemplating how I would be judged by my peers, members of my church. While I have been with them since 1982 and have done some very good work, by other measures I barely have made it out of the starting gate. My position on “The Bridge” is much lower than others with my longevity, and so is my economic status. I have not shown that much ambition, not that much willingness to be exceptional, even though some measurements would suggest that I would be capable of it.
Though I consider myself to be quite exceptional in my own way, by many social measures I am not. Everyone has a right to consider themselves special. But society favors whose who play by its norms, and I did not. I was interested in “average” people. How did they live? How did they think? What might be their fate?
My teacher (L. Ron Hubbard) tried his best to impress on his students that you do your best by helping others to do their best. He did not recognize any ultimate ceiling to what people could accomplish. But he did recognize that they would require leaders to show them the way.
Mediocrity in the name of equality?
It has become fashionable on the Left, for a long time now, to resent the income and power positions of the “elite” classes. All the personal income made in one year in the U.S., in recent years, has been roughly 18 trillion dollars. If that was spread evenly across a population of 300 million, that would equal $60,000 per person. The “median household income” in recent years was $75,000. Would life be better for everyone if these figures applied to everyone? Or would we all just drive Teslas to work and watch TV all weekend?
If a brilliant man or woman were not provided with the resources to manifest their brilliance in real-world creations, would life today be as “good” as it is for most of us? Would Amazon exist even if Bezos has not been allowed to keep most of his earnings? Would the internet exist, or smart phones, or men on the moon?
I have read the work of many people (like Hubbard, Edward Bellamy, and Henry George) who thought personal wealth could be decoupled from personal excellence, and a society could still achieve greatness and longevity. They thought that the exceptional among us would be willing to “compete” for non-monetary rewards that would motivate them just as much as our current system does. They uniformly also believed that such a society could not exist unless a spiritual awakening occurred that would bring it into being. That is also my fond hope.
Tom Woods recently helped create a video posted on ASG.stream (Advocates for Self-Government) called “The Housing Bubble.” This is a libertarian-leaning group and film. But this film is also an attempt to educate us about how personal and societal economics develop in a “natural” and positive manner. I won’t try to duplicate the entire theory here. But the film gives a series of steps that you would expect an individual or society to go through as it “grows up” and becomes more productive.
Here is my graphic of these steps:
Now I will go through these steps:
Learn a Skill
The film assumes it is talking to educated adults who are already working. So I added this step to be more complete. There are so many ways to learn a valuable skill! Most of us start by going to school.
Make Money
Finding work can be quite difficult, regardless of how well trained you might be. If you face societal barriers based on how you look or what your name sounds like, it’s even worse. And making enough money to live can be a problem, too. Societies that “can’t afford” to pay a living wage are setting themselves up for failure. Of course, some work pays better depending on many many factors. On top of that, you may prefer to start your own business and get paid by your customers instead of an employer.
There is also an ethical component to making money. If your only skill is pickpocket or burglar, you are not really participating in the society, but helping to destroy it. A society that makes it difficult to find ethical employment is, again, setting itself up for bad times.
Control Spending
If you buy more stuff than you can afford, you won’t survive well. The film makes this point in terms of lending practices, and mortgage lending in particular. An ethical lender wants to make loans to qualified borrowers. And one indication that you are a good borrower is that you aren’t already in debt and can control your spending. One obvious indicator is that you have savings in the form of cash or other liquid assets.
Save Money
The film makes the point that to get a “normal” mortgage, the borrower must be able to make part of the purchase. This normally means that the borrower has a substantial sum saved up.
There are a lot of reasons to own some cash (liquid assets). But when interest rates are rather high, you can actually earn money on a savings account. Thus, you would expect higher interest rates to stimulate saving, or send a signal to save money. Of course, the only reason your savings can make money is because your bank uses it to loan to other people (charging interest) and pays you part of what it makes.
Get a Loan
Thus, to get a loan, particularly a mortgage, from an ethical lender, you have to have your spending under control and probably have some money saved.
But if interest rates are too high, you won’t be able to afford the payments on your loan, particularly if it is a long term loan (15 or 30 years), as most mortgages are. So high interest rates tend to discourage borrowing, while low rates will stimulate borrowing.
Own an Asset
An asset that most people buy with a loan is a car. Though the car loses sales value quickly after you buy it, it is enormously helpful to most people in making a living. Of course, you do have to know how to drive!
The movie was all about owning a house. A good house gives one shelter and a place of privacy and calm. These are important factors is keeping yourself healthy and able to work and earn money. But housing, currently, is retaining its resale value, with prices usually going up and up. Thus, some people “invest” in a house like it is gold or a piece of art, really only hoping that they can sell it for a profit.
Meanwhile, housing for most of us is a service that costs money, and doesn’t make money, particularly if we are renters. If you are a landlord, you might be able to make money by renting housing to others.
Most assets that can make their owners money are productive assets. They are tools or equipment that can produce things that can be sold for a profit, or those products, made by others, that can be resold for a profit. This is the domain of businesses, large and small. All of the important material things that we use to help each other and keep ourselves alive are, in our culture, created by a human activity call “business.” The immaterial things that we rely on are another matter. However, entertainment has been almost totally taken over by business.
What could go wrong?
The film focuses mostly on one important failure mode, though there are many possible reasons why individuals or society end in poverty (scarcity) instead of prosperity (abundance).
When it becomes too easy to borrow money (or spend money you don’t have) then individuals never learn to control their spending, and no savings occur. With no cash reserves, there is no cash to lend unless someone just “creates” it (“prints” it). In recent years – and at times in the past – the economy has been “expanded” by just creating money. This is made worse when the money is then loaned out at very low rates, which further encourages borrowing while discouraging saving.
The above is the mechanism that creates “bubbles.” It allows prices to rise unnaturally and money to enter the economy without any production to back it up. When it happens to a person, it comes in the form of no longer being able to pay on one’s loans, resulting in one losing one’s car or house, or credit card.
Crime and other disasters
Various forms of crime can result in an individual or society losing their ability to work, or losing their housing or possessions to damage or destruction. In my opinion, the primary responsibility of government is to protect its people from crime.
Wildfires, earthquakes and bad weather can do much more damage than a few criminals. We all play a role in protecting ourselves from such disasters. In modern societies, the usual way to do this is by saving money, often through the mechanism of insurance. This does, however, substitute business for charity. The only way for an individual or a society to afford charity is for it to produce more than it consumes, so that it has a surplus that can be used in the event of bad times.
I might also mention the problem of education (or training). If this activity is neglected in a family or a society, and children grow into adults with no valuable skills that they can use to make a good living. That family or society has failed in one of its most important functions. Many modern schools are not doing a good job in this regard. Difficult times are ahead if this does not get corrected very soon.
All the functions and skills mentioned above – including even ethical behavior – depends on a working system of education. This system seems broken all around the planet and urgently needs not only repair but an entire reimagining.
This is the Flatstick, a “theme bar” located across the street from my apartment building. I’ve never been inside. The humorous (?) sign to the left is what caught my eye today and what this post is mostly about.
If it hadn’t been for an event just down the street at Solomon’s Deli, I might have saved this post for a later date. But with three visuals and this much intellectual “meat” to try to digest, I figured I would try writing something this afternoon.
The “new normal” is full of cognitive confusions
Most of us want a better life and a better world. Some of us think everyone on this planet wants this. A few of us are very sure that assumption is incorrect.
Many then ask, well, why don’t we have a better world? Most have no real idea, so they are willing to go along with one of the many theories in current fashion about why this planet is still so messed up. A few of us are quite sure that all these theories are incorrect or incomplete.
Learn better behaviors
The theory being put forward, apparently, by “modern” psychology, is that we all need to learn to behave “better.” If a person can’t learn to behave better, they deserve to be shamed, hated or … killed? … in the hope that this will cause them to learn their lesson. Of course, if it seems that a mental illness is causing the problem, then the person belongs in therapy. Maybe our ideas about “right behavior” also need to change, so we can be kind to more different types of people.
The whole theory expressed – however imperfectly – above is full of assumptions that many not be (or aren’t) true:
All our major earthly problems stem from not being nice (kind, considerate) to each other. (Really?)
The way to make more people act kind is to train them to act that way. (Okay…)
If a person can’t be so trained, he must have a mental illness of some similar condition requiring therapy. (Who makes this decision?)
Mental illnesses respond to drugs because the mind is in the brain. (This is categorically incorrect.)
Maybe the behaviors we used to think are bad (lying, cheating, stealing…) really aren’t that bad, because we’ve never been able to get anyone to stop doing them. Maybe we just have to accept these behaviors and learn to be kind to those people, too. Then the world would be a much better place. (This, of course, is totally insane.)
Faith, freedom and honesty
This encapsulates the approach of most who today call themselves “conservative.”
If a man of faith is given freedom, then he will do good, because he will be motivated by God, and God always does good.
You can tell a man of faith by his honesty level. Those who lie to gain advantage are not persons of faith.
God’s law is above civil law and guides the conscience. Civil law guides the day-to-day dealings of men and women. Abide by the first and enforce the second, and that should be all that is needed.
This approach has been somewhat useful over a long period of time, but is hard on real criminals, who are incapable of being honest. Thus, this approach is constantly being fought by criminals, who constantly seek to give religion and related subjects a bad name. This has led to the secular behavioral approach, given first.
Conflicts
Secular behaviorism is currently considered more “liberal” and enlightened than faith-based approaches such as classic conservatism.
The problem is that in faith, or in any religious belief, there lies a grain of truth which will never be forsaken by the faithful. And so the faithful will never, never, never be persuaded to embrace secular behaviorism in any of its forms, particularly in its current form, which seems to show “mercy” for criminals.
The grain of truth cherished by the faithful is that there is a power higher and more lofty than the powers of the physical universe; that this power, in fact, created the physical universe.
While it is technically incorrect to attribute this power to just a few beings, or gods, this mistake does not cancel the truth of the more basic assertion. And so a belief in Spirit lives on, and it will always be opposed to the denial of Spirit.
The traditionally faithful tend to gravitate to certain moral teachings for the reasons that they are part of their sacred texts and also seem sensible. In a more traditional moral system, sexual relations between same-sex individuals seems ridiculous, or wrong, because it does not forward God’s work of perpetuating the race. Similar arguments can be made against killing an unborn fetus or trying to change one’s body to match one’s fancied gender orientation.
But because the current “liberal” approach is so anti-Spirit, conservatives have had to make a place for people who are “socially liberal” but can’t stand the thought of handing power over to lunatics. This has given the Left the poetic license to brand conservatives as totalitarians. Currently, the Left is much more intolerant than most conservatives.
Is the “old normal” really that bad?
A bar run by a reasonably sensible conservative would not treat any of the “sicknesses” mentioned on that sign as good enough reason to kick you out of his (or her) bar.
COVID-19 is a treatable and fairly mild disease that most of us should now be immune to.
Racism is an archaic mindset that seems out of place in the modern world. But there’s no reason to assume it would prevent someone from being a perfectly civil bar patron.
Same with homophobia.
What we had with the “old normal” was a general agreement that truth was valuable and worth pursuing, and in a like wise, honesty was worth practicing.
We were discovering that politicians, news casters, scientists, even doctors, could play the role of criminal and lie to us. We discovered that we needed to trust our own sense of rightness more and question “authority” more. That freedom was workable in the context of human rights, but not in the context of absolute freedom for anyone to do anything they wanted. We were beginning to discover that a certain type of personality was trying to take over this planet and destroy all our progress towards real truth and understanding and replace it with a new updated sort of superstition and slavery.
So they decided to accelerate their efforts, and made great progress in that direction over the last year and a half.
Do we really want that to be our world? Will it really result in more kindness and generosity, less suffering and fear? Will it end war, sickness, pollution or global warming? If not, why should anyone support it?
These are my questions to you.
Birthday celebrations at Solomon’s
Hey, to me this was strange. But I could tolerate, I guess, a guy dressed in a rainbow skirt wearing a colored wig and way too much makeup hosting an event at my local Deli…
To be hugged by such a dude might be a bit much for me. But look, ma, no masks! Could we maybe inch our way back to the old normal?
On 16 July, 2020, the U.S. State Department released a report put together by a commission created by Secretary Pompeo for that purpose. The report is entitled “Report of the Commission on Unalienable Rights.”
The State Department exists to assist our government in implementing foreign policy and to provide government representatives in countries around the world who act to protect U.S. citizens and interests in those countries, and to serve as liaisons to foreign governments. In recent years, dating back to the mid-1980s perhaps, our State Department has come to be known for its human rights monitoring activities. I am only aware of them becoming a major factor in diplomacy in the past 10 years or so. Previously, the byword of our foreign policy had always been “democracy,” not “human rights.” You can look at the founding documents of a nation and see whether it is a democracy or not. But how well it protects the rights of its citizens is more difficult to discern.
This report has been widely seen by Trump opponents as a sort of cynical way to reframe the issue of human rights in ways that support the viewpoints of the new administration. The whole gay rights question is de-emphasized, while religious freedom (or tolerance) is brought forward.
For me, those quibbles are not substantive. What this report does for me is give me an opportunity to repeat my view of the proper context for understanding the subject of human rights, note where the scholarly view has traditionally fallen short, and to see if I can find any evidence that this group of scholars has achieved a better understanding of the subject.
Spiritual background of the subject
It has been with considerable difficulty that any progress has been made in understanding the more basic truths that underlie our existence on this planet at this time. Search high and low, and we find minimal data on this subject that can be characterized as anything above the level of myth and speculation. I briefly summarize this data:
As individuals, as personalities, as beings, we began our journeys in this reality as non-material points of cause. We quickly assembled for ourselves a “playground” of sorts. Today that “playground” is known as the Physical Universe. As bodyless beings, we had no need for “rights.” We were, in our native forms, invincible and immortal. We could engage in games with each other of a most violent and furious form. But in our thirst for “experience,” we gradually added factors to these games that included concepts like “right/wrong” and “good/bad.” We chose to identify ourselves with objects we had created, and to accuse each other of “violations” whenever those objects became lost or damaged. Today, the primary object we identify with “me” is the body. Secondary objects include our possessions.
Out of what could easily be interpreted to be a decline in the level of game, we evolved sets of “rules” that seemed to be necessary to keep the game going at an acceptable level of play. One example of an early set of such rules is the Ten Commandments. Most human societies have such rules. Some of them are more severe and would be considered “less Christian.” The advantage of the more “Christian” rules seemed to be in the degree of security and happiness they secured for more players, the women and children in particular, but also many men who, not wanting or needing to be warriors, grew tired of being called on to fill that role.
The key roles in those traditional games of human society that most of us still value and seek to promote are reflected in our game of chess: king and queen, knight, rook, bishop and pawns. (Chess, by the way, seems to have arrived in Europe via Persia, and has several Asian variants.) We see in these roles: governance, military, the support structure for these (rook), religion or popular local management (bishop) and everyone else.
The need for a military role
The role of the “knight,” soldier or warrior, is to fight for the defense, or advancement, of some group, and be perfectly willing to die in that fight. Traditionally, the spiritual value of the soldier seems to rest in his ability to perfect his willingness to die, for in so doing, his courage is also perfected. As far as I know, these more spiritual concepts of soldiery are dead, but I could be wrong about that.
But what is it about modern games that continues to make this role so important? From my point of view, this devolves to the central and basic problem in any game but especially human games: Those who can’t or don’t want to play “by the rules.” And though for much of history “the rules” allowed for the pursuit of war, after our more recent experiences with this aspect of play (WWII in particular), humans began to get the feeling that we had taken this aspect of play too far, and it was time to outlaw it; to make it into a “bad” activity. Wanton violence had always been frowned upon, particularly when it was directed at the defenseless (anyone other than a “knight”). Now that officially includes the act of war itself. This is noted for its significance in history, though it has no particular bearing on the flow of this discussion.
What keeps the “warrior” role important today is crime and the violence that surrounds it. In my view, this has always been the more important role of the warrior. Though “crime” now technically includes war (making the soldier, oddly, into a kind of “criminal”) it can be more broadly defined as any action that violates the basic rules of the game. Crimes are compulsively committed by “criminals” but often by others out of desperation, greed, ignorance or other factors. When crime involves violence, a warrior is often called on to defend the victims, or to try to catch or stop the criminal. As the criminal often uses weapons, this explains why most “warriors” also prefer to be armed.
The basic rules of human games
Traditionally, human rules (or law) applied mostly to governance, management and warriors. These were considered the real players. But there has been constant pressure from the bishops and pawns to be included in these games as players, and so the rules, and their enforcement, have been gradually extended to include everyone. The traditional focus of law, however, remains.
The basic rules of play follow the basic needs of human groups to survive. These include some way to “own” and defend resources like land, food and shelter, the need to protect “innocents” (women and children and elders) so that the group can survive in body and in culture, and above these, some sense of justice, responsibility, beauty and virtue. These basic rules are “inalienable” in the sense that they go with the basic human game of life. If they aren’t followed, the game of human life could end.
In any attempt to list these rules, the notion of seeing them as “rights” appears as one way to frame them in language. But we could also list them out as a set of essential activities that require protection if the game is going to continue. There is also a sort of philosophical component to the list, which has to do with the level of society where these rules begin to be important. As social norms, they could be seen to apply most strongly at the group level, as that is where they must originate. But there has been a persistent urging to elevate the importance of the individual in the games of life. Historically, individuals (including great leaders like Christ and Gandhi) have suffered so often when the rules were applied to favor the interests of the group, that today it is seen proper to extend these rules to protect individuals and not groups only. In this sense, our current concepts of “rights” are anti-democratic!
Responsibilities of leaders
You cannot be a leader if no one is willing to follow you because you only look out for yourself at the expense of the interests of others. This has continued to be a huge problem with leaders. Yet most leaders, if questioned, would agree that they serve to forward the purpose of keeping the game going, and that means looking out for all the players and seeing that their ability to participate in the game is protected, and perhaps even enhanced.
In modern terms this means that leaders have a responsibility to their followers, their “people,” to protect the game and protect each one’s right to play. Beyond that, leaders may strive to enhance the ability of individuals to be players. But the traditional assumption is that this ability is not much in question; if given the right and opportunity, most people will do just fine as players.
The popular expectation of leaders, then, is embodied in the words of our Declaration of Independence (as a relatively modern example):
“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.–That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed…”
The popular expectation is, then, that government will act to secure the rights of the governed to life, liberty (freedom) and the pursuit of happiness. In this tradition, there is no expectation that government can ensure that happiness will result. In more modern traditions, this expectation sometimes plays a stronger role.
Most bluntly, though, what this reduces to in terms of the activities of government is to protect its population from criminals and criminal acts. Of course, if the government itself turns criminal “we have a problem.” But this was never the primary concern of the governed, from what I can tell. They needed the basic protections against theft, violence, famine and so forth that threatened their survival on a daily basis. They assumed that governments could be capable of this, and were not quickly persuaded that governments would lose that capability. At the local level, the police were seen as the protectors, and as long as there were a few police around, things should be okay. At the local level, the police held the warrior role.
Governments as criminals
The picture painted by the history of human rights is one that seems quite contrary to the above expectations. Governments and tyrants are seen as the great criminals of history. And so our “rights” are framed in the context of protecting us from government infringements. But this does not necessarily coincide with the experience of the people. The level of government where those battles over “rights” were fought was usually the national level. Yet the reach of national governments rarely extends to the daily lives of people. Most people deal first with local governments, local police, and local criminals. Their concerns are usually focused on crime and the police, and not on government or legal concepts.
This, then, I see as the proper and more understandable context of Human Rights. In this context, governance and warriors are assumed to be in a position of being able to protect the rights of the people against the encroachments of criminals. The big question is how successful they are.
To get all caught up in the problems of criminality in governance, while relevant, misses the point. The problem we have as we attempt to play the game of human life is crime, not government. The stress of any campaign to strengthen the protection of human rights should be aimed at the correct target: Crime. The correct target is not governance, or warriors. They only become targets if they go criminal. And though this is a very common problem, to dwell on it as if it were central is incorrect.
The report mentioned earlier – the supposed raison d’etre for this piece – contains but one paragraph that I could find that addresses this most important and central theme underlying the subject of human rights:
Rise of Human Rights Violations by Non-State Organizations.
Non-state actors have long posed a challenge for human rights, which paradigmatically apply only between nation-states and the individuals under their jurisdiction. Recent years, however, have seen an alarming multiplication of the number and diversity of non-state groups responsible for large-scale human rights violations including, for example, terrorist groups, transnational organized-crime networks, purveyors of child pornography, and organizations engaged in human trafficking. These non-state organizations are often based in fragile states that lack the capacity or political will to address the abuses originating within their territories. In such weak states, the relative power and autonomy of multinational corporations and other business enterprises can present complex challenges for the promotion and protection of human rights as well.
Report of the Commission on Unalienable Rights
And there it is. The above paragraph succinctly states the core of our problem. It lists all the important criminal players, along with some (legitimate businesses) that can turn criminal. I believe it underestimates the problem of “weak states.” This has been a concern for centuries, even in “developed” countries. The main problem in the past was that the criminals were often able to persuade governments to legalize – and protect – their criminality. This remains a major concern to this day, in all nations.
Strategy for improved success
Laid out this way, I hope a way forward becomes more clear. It begins with naming the real target responsible for human rights abuses, the criminal. This target must be more fully understood. Its tactics must become well-known and counter-tactics must become more fully developed. In modern times, this means far more than “wars against…” This expression has been applied so variously to so many different activities, and with so little result! It means a revival of dialog that will result in the establishment of best practices in all sectors of society where crime might lurk. The distribution of criminals in society is perhaps the key to understanding why this viewpoint is not more widely used. Crime lurks in all sectors; none can claim total freedom from it. Thus the need for counter-balancing structures (such as those set up by the U.S. Constitution) that will assist to “keep everybody honest.” This understanding also frames the problem of gaining enthusiasm for a real crackdown on crime.
The basic strategy, then, would be to enable and strengthen the various elements in society that are expected to play key roles in the restraint or elimination of crime. This includes all individuals who wish to participate as players in the games of life. They need basic information to counter the disinformation they often receive from criminal interests trying to confuse them and their allegiances. But the focus of our more visible efforts would be aimed at the levels of management, up through the warrior classes and of course including the governing classes. I use this terminology because it matters not to me exactly what system any particular nation or culture uses to achieve human rights. It matters much more to me that human rights are actually achieved. Thus, the managers, the warriors, the leaders must have programs of education and training made available to them that will appeal to them, speak to the problems they face, and help them to successfully overcome those problems. What I am saying, then, is that they have been missing a technology. And that is the technology of how to protect the human rights of their people against criminal incursions. They will never have success in this if they cannot find a technology that works. We can talk about human rights until the end of time. If we don’t know the basics of how to achieve them, they will never be achieved.
I hope the sites I took these images from don’t mind me using them.
The above graph is the one I looked at, years ago, that made be ask the question that is the title of this post.
Now, I know people have secrets. And I know people can “conveniently ignore” certain facts. So, I figured that I might never find out for sure why this graph looks like this.
This graph is not just a peak that temporarily interrupts a trend. This graph is a mountain that has never been repeated – and looks like it never will repeat – in a time span amounting to approximately one hundred years.
Sci Fi break
I will start by telling you what I think happened. So you don’t need to read the rest if you don’t want to.
I think the greatest superpower on Earth decided that it had to do something about E.T. So it opened the money floodgates and secretly funded the biggest joint military research project this planet has ever seen. And possibly, something came of it. But probably all it managed to achieve was a kind of standoff. And so our leaders still can’t tell us about it, because they don’t yet feel very much in control of the situation.
That’s what I think happened.
Financial explanations
What the graph itself shows is that the Fed (Federal Reserve System) was trying to stave off inflation from an economy that was growing too fast. They did this by raising the prime rate to encourage savings and discourage borrowing. That is a standard method for reducing the money supply.
However, this policy strained the Savings & Loan system to its breaking point. It couldn’t pay higher interest on savings without getting higher interest payments on the mortgages it held. But those were fixed-rate mortgages. So the S&L system broke down and a lot of banks went out of business – at least a thousand by the time it was all over. Now you can’t earn any interest by saving money, not even at a Credit Union.
The Fed gave up on this policy and opened the floodgates to easy money and no savings. People who could afford it became investors instead of savers, and people who couldn’t afford it lost their assets. The average “poor” person today has about $4,000 worth of assets. The average “wealthy” person today has at least 1/2 a million. And the economy runs, basically, on debt.
Here is a graph that shows the ’80s as a blip in a trend. Many financial graphs look like this. The price, or “value” of many assets has gone through the roof. This is an indication of the wealthier players jockeying to own more and more. To an extent, it may reflect population pressures. The amount of agricultural land hasn’t changed that much, yet prices indicate it is getting “scarcer and scarcer.”
The government, for its part, had expanded incredibly through the war years with very high tax rates until the end of the Vietnam War. The the wealthy started pushing for a decrease at the high end. And finally Reagan got in and pushed the high end way down. You see how these two lines follow each other most of the time. One is the highest income tax rate, the other the lowest. But you can see there’s a place where they don’t. The high side falls while the low side increases. That’s 1985 to 1987. Reagan had practically equalized tax rates over the entire range of taxable incomes. And they have stayed that way ever since, indicating that the wealthy have managed to have their way.
And so, growth or no growth, money has stayed cheap since the 1980s. The only ones who can really afford to borrow are the wealthy. But almost everyone else has to borrow anyway, just to keep going, or to “maintain the lifestyle they are accustomed to.”
Does this tell us any more beyond the fact that there was some sort of basic shift in monetary policy because the old policy wasn’t working? No, that’s about all it tells us.
Timeline
Can a timeline of events give us any insight into this? (The answer is not much, as there are likely secret events that will never see the light of day.) Let’s see:
I used a lot of sites to obtain this list. It’s not complete of course. I tried to include the more significant events of the period, along with some cultural and tech milestones to help keep readers oriented.
Dates are written yyyymmdd as is customary in databases.
1980 Rubik’s Cube widely released as a toy. Ronald Reagan elected president later in the year.
19800331 President Carter signs act to “deregulate” Savings & Loans.
19800518 Mount St. Helens erupts.
19800522 Pac-Man video game released in arcades.
19800601 launch of CNN, the first 24-hour cable news network.
19801208 John Lennon killed.
19801224-28 Rendlesham Forest incident. This was a UFO sighting incident.
19801229 Cash-Landrum incident. Another UFO incident, similar to the one depicted in Close Encounters.
19810202 CIA Director says, “We’ll know our disinformation program is complete when everything the American public believes is false.”
I am the source for this quote, which was indeed said by CIA Director William Casey at an early February 1981 meeting of the newly elected President Reagan with his new cabinet secretaries to report to him on what they had learned about their agencies in the first couple of weeks of the administration.
Barbara Honegger, Nov 25, 2014.
19810330 John Hinckley Jr. attacks President Reagan, almost killing him.
19810518 First cases of HIV/AIDS reported.
19810812 First IBM PC released, running the first personal operating system, DOS.
19811006 Anwar Sadat (Egypt) assassinated.
1982 L.Ron Hubbard’s Battlefield Earth is published.
19820402 Faulklands War starts…
19820502 The Argentinian ship Belgrano is sunk.
19820611 Spielberg’s E.T. premieres.
1983 to 1985 Famine in Ethiopia.
19830101 Internet is born on ARPAnet.
19830120 MIDI is demonstrated at the NAMM show in Anaheim.
19830228 TV show “MASH” ends.
19830307 Time magazine reports on Senate hearing on military over-spending. This became a big issue and continues to be.
19830618 Second Challenger flight carries first female astronaut.
19830901 Soviet fighter jet accidentally shoots down KAL-007 passenger jet.
19830926 Stanislav Yevgrafovich Petrov was the duty officer at the command center for the Oko nuclear early-warning system when the system reported that a missile had been launched from the United States, followed by up to five more. Petrov judged the reports to be a false alarm, and decided to disobey orders (against Soviet military protocol). This action is credited with preventing an erroneous retaliatory nuclear attack on the United States and its NATO allies that could have resulted in a large-scale nuclear war.
19831023 US barracks in Beirut Lebanon bombed, killing 241 soldiers.
19831114 Michael Jackson’s “Thriller” music video released.
19840101 Bell System telephone network broken up.
19840503 Columnist Jack Anderson exposes CIA’s remote viewing project.
19840815 Lake Monoun outgassing kills 37 in the Cameroon.
19841031 Indira Gandhi (India) assassinated.
19841203 Poison gas leaks from a pesticide plant in Bhopal. It affected over 1/2 million people. Overall death toll about 20,000.
19850128 “We Are The World” is released to raise money for starving Africans.
19850311 Mikhail Gorbachev becomes leader of U.S.S.R.
19850623 Terrorists destroy Air India Flight 847.
19851119 Reagan and Gorbachev meet in Geneva.
1986 to 1988 One hundred B1 bombers are built by Boeing and delivered to the Air Force at a cost of $415million (2018 dollars) per plane. New ballistic missiles were also developed during this time, at a similar cost per missile, but never really deployed.
U.S. Air Force Photo by Staff Sgt. Bennie J. Davis III
1986 to 1989 Three hundred Savings & Loans were closed.
19860124 L.Ron Hubbard dies.
19860128 Challenger explodes soon after takeoff.
19860314 Microsoft goes public.
19860426 Chernobyl disaster occurs in Ukraine.
19860821 Lake Nyos outgassing kills 1,746 in the Cameroon.
19860908 Oprah Winfrey Show goes national.
19861117 JAL flight 1628 incident. A UFO sighting.
19870511 Ex-Nazi Klaus Barbie tried in Lyon France.
19870817 Ex-Nazi Rudolph Hess commits suicide in prison.
19871208 Intermediate-Range Nuclear Forces Treaty signed. This was a treaty between the U.S. and Russia limiting nuclear missiles.
19880703 Iran Airlines 655 shot down by accident by US Navy.
19881108 George H.W. Bush elected President.
19881221 Pan Am flight 103 explodes over Scotland, killing all aboard.
19890324 Exxon Valdez oil spill.
19890418 Tienanmen Square protests take place.
19891109 Berlin Wall opened, later torn down.
19891202 Bush and Gorbachev “bury” Cold War at Malta Summit.
Courtesy RIA Novosti via Wikimedia Commons
Notice anything?
It’s not really easy to see any particular patterns here. Obviously, a lot was going on, considering the U.S. was not participating in any hot wars at the time. Reagan felt the need to cut taxes while building up military spending, then made peace with the U.S.S.R. and saw many of his Cold War weapon systems dismantled. So…why the military buildup?
Meanwhile, many major technical mishaps occur – one almost leading to World War III. We are learning that our technologies have limitations, but doing little with those lessons.
The U.S. and really the whole planet was sliding into a “post-industrial” era, when computer networks and surveillance would become more and more important, while hot wars became more and more unthinkable and limited. Manufacturing begins moving offshore to Asia, and more Asians are able to afford high-tech gadgets that were originally all exported to the West. The internet started and expanded enormously. Real computer music got started and the “great bands” of the ’60s and ’70s faded away, replaced by disco, electronica and hip-hop.
The drug epidemic in the West got worse. And society – as people – became more and more out of touch with the realities of life on Earth. Environmental problems were set aside, as if something else was more important. But what was more important? Well, what about those UFO sightings?
We have confirmation from several fairly good quality, and rather unpretentious, sources that the E.T. problem was considered real by many world leaders. I see the 1980s as a kind of retreat in the face of a superior power that no one knew how to handle, and that no one except “conspiracy theorists” wanted to talk about.
Your considered opinions, or additional data, are appreciated.
As more pronouncements occured regarding how best to “flatten the curve,” I thought it might be wise for me to go out and do my weekly shopping a day early. The day was forecast to be sunny (it was at least partly sunny all day) and of moderate temperature after a series of long rains.
I brought my bike with me in a quite sparsely-populated train. The first thing I realized was that I had forgotten my camera, and so this post is unillustrated. I was wondering if anyone would try to enforce the six-feet rule on the train. It wasn’t until we reached the first station in Folsom that a security person got on and checked for evidence of paid fares. And though she didn’t mention the six-feet rule (there being only two passengers in the whole car), I noted that she just looked to see that I had a CONNECT card, but didn’t take it from me and hold it under her scanner as she normally would have.
Folsom Winco was, thank goodness, not overly crowded. There were a lot of older people there, many a good deal older than my 65 years. Winco was keeping its bulk bins open (I wondered if they would), but had run out of certain items, such as dry roasted peanuts to make fresh-ground peanut butter. They were also out of organic rolled oats. Sometimes I think they could just switch to totally organic and probably only suffer a minor loss of customers!
The lady running the self-serve checkout machines had to help me with an item that didn’t register the same weight when I weighed it as it did when I bagged it. She commented on the flourishes I used to enter the product codes and swipe the bar codes, saying she found them entertaining!
I packed everything into my panniers, and placed a little zipper bag (found at Goodwill) inscribed with the message “see you at the barre” on the top of the rear rack using a couple of bungee cords. It contained some water, a couple of odd items that didn’t fit easily in the side bags, and a fig bar. And I was off.
In the first field I bike through to get to the river, I found the Miner’s Lettuce now overgrown with grasses, the blue allium blooming all over the place, and a lovely yellow borage (probably what’s known as “fiddleneck”) popping up in places. Then I spied a small raptor in a short tree just ahead. It flew off as I approached and tried to catch something on the ground but was apparently unsuccessful. Eventually it flew back and sat on a post not far away and let me look at it. It had a lovely mottled brown plumage and bright yellow feet.
I then joined the main trail. It was quite busy! At first it seemed like the usual crowd of Saturday fitness bikers, then I started seeing families and older people. I realized that with school cancelled and many jobs suspended, this first sunny day of the week was the perfect time for families to leave their dreary homes and enjoy the out-of-doors. I heard one guy comment as he passed, “The park’s just like the day before Christmas!”
Importances
In these days where touching someone or going out for a frivolous social event – or work – runs the risk of “unflattening the curve,” our leaders have had to wrestle with the question: “What’s too important to close down?”
Here in California the “winners” have been: hospitals and other health care facilities, core infrastructure services that most of us never think about, food distribution businesses, food growing businesses – even breweries, homeless shelters and the like, news media, gas stations and auto repair shops, banks and credit unions, hardware stores, home repair workers, mailing and shipping companies, educational institutions if they can find ways to do their work without having people touch each other, laundry services, restaurants but like schools – take-out only, office supply stores and similar supply businesses, delivery services, transportation that supports essential activities, care-givers, professions needed to support essential activities, childcare as modified by certain guidelines, and employees needed to maintain essential operations in business (like security guards and whatever).
When I was a lot younger I would have looked at this list and felt that it made sense. But back then I would have wondered, well, why do people do all those other things besides these things? Now I have a better idea of why they do. But that doesn’t change the fact that the above-listed activities are some of the most core activities in any human community. If any one of these goes bad – like health care, or food – those affected are in some deep doo-doo. And yet in our society these days, many of these activities are operated as for-profit businesses.
In theory, if some human activity ceased to be profitable, it could not attract investors, would go unfunded and eventually collapse. But that can’t happen to any of these essential activities, can it?
And although there may be some wiggle room in the grey areas of moral choices, the basic answer is, no, that can’t happen to essential activities.
My thought on this is that if you try to force any essential human activity into a situation where it can’t survive unless it can pay investors interest, then you are going to run into some major problems sooner or later.
One scenario is that the investors – normally represented by the Board of Directors – force managers to do whatever is deemed necessary to keep the activity profitable. In other words, managers are pushed towards throwing moral values and humanitarian values – which is why most of these ARE the essential activities – out the window in favor of a value system based on whether the activity can make money or not. We know that this has happened to many human activities. A vivid though imperfect example is the field of mental health.
The other scenario is that the activity somehow manages to make the necessary financial adjustments in a way that preserves both the core values of the activity and its financial attractiveness. We know this doesn’t always happen, and that we have lost or risk losing some of these core activities simply because they can’t figure out how to make themselves viable.
My more recent realizations about all this stem from Hubbard’s assertion that money is basically just a form of energy. That led to the understanding that every activity must inflow more energy than it uses just to operate at all. In a purely physical system this excess energy is often referred to as “waste.” In a business it is often called “profit.” And in a non-profit it may be known as “reserves” or some similar concept.
In a physical system, the ratio of energy output to energy input is called “efficiency.” However, attempts to apply this concept to human systems have not always been that successful. One reason is that the economists don’t always factor in the costs (or energy use) of all those essential services needed because we are human. If this mistake is committed and the result is a recommendation that new hires be paid less (or some similar move), then that mistake may contribute to what we call “poverty” for some workers; they can’t make a “profit” on their own labor!
The complications resulting from the various pressures of life and less-than-rational human responses to those pressures are many and varied. One example which I looked into a while back is public transportation. I don’t know about other places, but in the Sacramento area, customer (rider) revenues only account for about 20% of the operating costs of the system. If the Sac Regional Transit District couldn’t get state and federal money (support from taxpayers who don’t use the system) then it couldn’t provide the services it does now. I don’t know if it could even operate.
Another I have been looking into recently is the mental health system in California. It’s problem is that not enough people want to be mental health workers, and a lot of communities don’t want anything to do with having a mental health facility in their area, or otherwise have a bad image of the subject. In this case, the activity is currently over-funded but is unable to provide the services demanded of it. In short, it’s a criminal system. It wastes almost all the energy poured into it, so everyone’s getting tired of it, even though everyone knows that better mental health would help society in so many ways.
So this is one of the huge shortcomings of “modern” society: It has real problems drawing the line between brag and fact, and forcing essential activities to get good products instead of resorting to criminality. Just today I read an article on the history of coffee production. It gave me chills! The amount of inhuman treatment of workers that had to be undertaken to make coffee profitable was utterly despicable. And that doesn’t even take into account the fact that coffee is basically just a legal street drug and only masks the true problems people are having in being alert and productive with a temporary “high.”
I hope this latest challenge gives some who care about such things reason to pause. Over and above all the gory details about how this outbreak actually came about, we have the irritating fact that the medical knowledge – even the spiritual knowledge – that, if used, would have made this attack much less serious than it has been, has been with us for decades now, neglected and unused. We can’t just blame our ills on “profit motive.” We all need what sometimes gets called a “profit.” There are more basic failings at work here. We have known about them for some time now. But we have only begun to properly handle them. Not in time for this challenge. What about the next one?
About a year ago, a young man named Nick Jamell started a blog ConversationOfOurGeneration.com in an attempt to cut through the lack of clear thinking and responsible debate that he saw occurring across the internet and in public life on matters of social importance.
He was recently interviewed by Jack Spirko (at The Survival Podcast, which caught my attention because it deals with Permaculture), and he seemed like a sincere guy who really wanted to see some changes made on this planet. I offered to write a “guest blog” for him, and he graciously agreed to publish it (linked above).
I wrote a piece entitled “My Paradigm Shift Experience” which tried to convey in just a few words the depth of change a person may experience as he shifts from merely studying and discussing the human situation to becoming involved with a group that is actually doing something about it.
I might note that this shift started for me by reading a real book and interacting face-to-face with real people who were involved with the movement we all know as Scientology. I don’t know if an experience like that can be duplicated on the internet. But as this internet is now the place where so many of us connect, I hope that for many people that experience can at least start here.
I wanted to get started on this topic. I may go back and amplify this later.
Balance Sheet for Planet Earth
Years ago I read an article about a man who was attempting to create a “balance sheet” for the planet. This idea was the work of Robert Costanza, founder of Earth Inc and developer of a subject he calls Ecological Economics.
Like any corporation, Earth, Inc.’s objective is to maximize profit for its shareholders, but profit for this global institution is defined as every human’s wellbeing, established by sustainable use and enhancement of Natural, Social, Human, and Built capital.
How do you measure human well-being? I was doing bookkeeping work when I ran into this, so I found it an interesting concept.
Systems
In science and engineering, we have the concept of a “system.” Scientists and engineers have long dealt primarily with mechanical or only-physical systems. Sociologists, on the other hand, have been interested mostly in human (or animal) systems. It eventually became clearer that these two fields actually overlap, often extensively. The problem was really one of analysis. Our primary way to model a system for analysis is through using mathematics. However, the mathematics involved for a complex system (where there may be hundreds of interrelated actions) were too cumbersome until the advent of computer-based modeling.
Economics
The word “economics” shares its root with “ecology” and similar words, where “eco” comes from a Greek word meaning “house” or “household.” Obviously the sense of the original meaning has been broadened, so that these subjects can be applied to almost any system, but still somewhat using the analogy of a system to a house. Obviously, it is people who run an economy. So that places economics in the social sciences. “Natural” systems, even if living, are seen as self-governing, and – by most researchers – as self-created for that matter, but research in other directions has demonstrated that this is not totally true. Even in purely physical systems, the fact that someone (the researcher) is observing the system seems to have a subtle influence on how the system behaves. This opens the door to treating systems formerly thought of as merely physical to something a little closer to alive.
Permaculture
As I have been looking into the subject called “permaculture” for a while now, it is worth mentioning that this is a good example of an attempt to create a design philosophy – if not a rigorous mathematical model – for a human-built “natural” system. Because the creators of permaculture sought to keep the subject simple and teachable, this is one good way to get a feel for how to approach the problem of applying both physics and economics to a system.
Money is Energy
However, before I was introduced to permaculture, my studies had introduced me to the idea that money can be thought of as a type of energy, or as a way to measure energy flows.
When I was trying to re-locate the article I had seen about a planetary balance sheet (I finally found it in my electronic library) I ran across several school lessons (an interesting resource that often appears in searches) with the name “Earth’s Energy Budget” or similar terms. These lessons were mainly written to help students wrap their heads around the “greenhouse effect” climate theories. The fact is that without an atmosphere around Earth – including a portion of CO2 – surface temperatures would be much more crazy than they are now, and the planet would be barely livable.
In these lessons, we have an example of a living system that is relatively stable, or in balance. So I thought I’d go through it briefly as an example. The system (as modeled for analysis) has just one input, sunlight. Though this may not be strictly speaking totally accurate, that one input dominates by many orders of magnitude any other physical input into this system. Most of these lessons start with 100 “units” of energy into the Earth system. Basic theory of a balanced system predicts that 100 units of energy should exit the system (be measurable as outputs). Again, this might not be strictly accurate, but in this system, that’s what we see. The measured outputs are:
30 units reflected light.
49 units atmospheric heat lost to space.
9 units water vapor heat lost to space.
12 units surface heat lost to space.
You will see that these numbers add up to 100, confirming that the system is in balance.
The atmosphere and the planet surface convert 70 percent of incoming sunlight to heat. After that the interaction between surface and atmosphere becomes extremely important, with about 100 energy units constantly cycling through that part of the system.
In the lesson I took these figures from, the students are asked to stack pennies on a diagram illustrating these various energy exchanges in order to visualize the size of these different flows. I have not yet come up with an adequate visualization for the system I am more interested in.
A Model for the Economy of Earth
The amount of energy used by the humans of Earth – or even the entire biosphere – is only a fraction of a “penny” in the energy system illustrated above. Yet we humans are quite sensitive to relatively small fluctuations in the flows of our systems. Beyond that, there is no doubt that we, as the most sentient beings on the planet, must take responsibility for the natural systems we interact with. But we have only been able to really monitor those systems for the last 100 years or so. We are babies in the game of managing planets; and our lack of experience is obvious!
Balance sheets concentrate on reporting assets versus liabilities. An imbalance in favor of assets suggests the enterprise being reported on is doing well. An imbalance in favor of liabilities suggests it is in trouble. In business, these reports are made every year, or sometimes even every three months. While it would be good to keep track of the entire planet on a similar time frame, that might not be practical. But the way things are currently playing out, we should know where we stand at least every five years. And we could probably figure out how to reduce the reporting period down to a year or less once a working system was established.
In physical systems, assets – or pools of potential energy – are relatively unimportant. In the above example, the heat generated by the Earth itself can be totally ignored. Similarly, “liabilities” is basically a human concept. So physical systems are mostly about flows, or only look at the energy storage structures that could directly influence those flows.
In fact, even in human systems, “assets” and “liabilities” are actually not that easy to evaluate. Many things counted as assets lose value over time due to wear and tear, etc., but that’s usually only roughly accounted for. The most important long-term asset is land. Probably the least important is cash. Yet both of these have volatile prices. In business – as in physical systems – the more important measures of health are its flows; is it making more than it’s spending?
The daily flow of energy received from the sun is estimated to be about 11,000 exajoules, an enormous number. Humanity needs only about 2 exajoules a day. It takes most of this energy from “fossil fuels” as well as other carbon sources. It is hard to imagine at this point how things would change if we got all the energy we needed by converting solar radiation. Plants perform this conversion every day, yet that mechanism is insufficient to do the job, as we need to leave most of the plants where they are to perform other functions. In any case, energy input is really not the problem for our world balance sheet. It seems to be more a problem of human behavior, which is classically thought of to be governed by “policy” but more often governed by other factors that most managers seem confused about.
How limited are resources?
What ecologists call “resources” is what economists might call “assets.” Yet planetary resources do not appear on the balance sheets of most businesses unless they have direct control over them and are actively exploiting them, such as in mining. Even then, the land might be valued by its cost of purchase, and that purchase might be seen by the company as little more than one of the costs of production.
Yet, obviously, planetary resources are limited. The most obvious example of this is land area. The only way to get around that is to build skyscrapers and huge basements. The air and its quality is also a limiting factor, as are sources of fresh water. With sufficient energy inputs most limits listed so far could possibly be overcome. This might well be true of all important resources.
Thus, we are looking at a “balance sheet” where “assets” could be valued near infinity. Why, then, do so many people feel so “poor?”
Our ability to handle energy flows
It appears, then, that our basic problem must have something to do with our ability to handle large energy flows. Indeed, people who have the ability to handle energy flows sufficient to operate an organization that does billions of dollars of business a year are considered so rare and valuable that they can garner huge wages all out of proportion to the economic needs of even a large and wealthy household.
The ability to arrange for the energy flows that would be necessary to make this planet work well for all life forms currently using it as their home is probably a key limiting factor to our economic progress. Even given all the criminal enterprises that drain energy out of the system, or waste it, or use it to damage people or property, we could probably do well anyway if there were enough of us that could conceive of and implement systems that could handle energy (and money) flows sufficient to do the job.
I wanted to write something about this subject because I have been studying about how home loans work, and it helped me realize some things that others have been pointing out for a long time.
Note that on 19 May I rewrote this post to try to make it more accurate; see more about that below.
Financial people tend to speak in terms that are not easily understood, and to assume you know about something that you don’t actually know about. However, most people have heard of the term “balancing the books” and this is a basic concept worth going over.
I suppose the idea that the books have to “stay in balance” is similar to the idea that “for every action, there is an equal and opposite reaction.” In the physical universe, this is true by observation. However, money and finance are conceptual universes, or you could say a kind of mathematical model of the physical universe. If a car exists, it is assumed that someone was paid to make it, whether that’s really what happened or not. So if I buy a car, I basically convert some of my cash into a vehicle. In my books (if I kept books), the price paid moves out of the Cash asset category and into the Vehicles asset category, and they stay balanced. What if someone gave me the car? I basically have to create a special category for gifts, which in a commercial business would be similar to something called “retained earnings”.
Debt
Now, say I’m a bank, and I have some deposits from my customers, and loan a portion of these to someone. This decreases my cash – the pool I make loans from. How do I replenish that pool (other than by getting more deposits)? In normal banking I would have to use part of my income (payments on loans I had already made to other people) and put that back into my cash. In mortgage banking I could do something called “selling the loan.” Basically, the loan turns into a security (essentially a document that can be bought and sold) that I can sell to a company that buys those types of securities.
Where do those companies get their money? They also create and sell securities – stock, basically – to investors. The investors include a lot of firms that help people save for retirement, as well as other investment firms. Those firms buy all sorts of stocks and other securities with that money.
The ultimate source of money for buying debt (making loans) in the U.S. is the Federal Reserve. The “Fed” is part of a network of “Central Banks.” Central Banks get charters from governments to control the money supply for them. They regulate banks, and they buy debt (or make loans, however you want to look at it). The Central Banks deal mostly with the large commercial banks, which are all international corporations. Smaller local institutions deal mostly with the big banks. The chain of purchasing debt works its way down until you get to the borrowers, who are expected to keep up their flow of payments. Governments are also large borrowers. To borrow money, they issue “bonds,” which come with a promise to pay dividends, and the full amount borrowed at the time of maturity. So in the case of government borrowing, the taxpayers, have to pay all that through their taxes. That’s why “bond initiatives” have to be approved by voters. In the end, a lot of what we make at our jobs goes to make profits for the owners of “debt.”
Making Money
Before my recent studies, I hadn’t really heard about this practice of “selling debt.” But debt is a receivable on the bank’s books, so it is worth something. It never occurred to me that you could somehow sell that to another company to get more cash (stay liquid, as the financial people call it). But this is really just another way of saying that the bank borrowed some cash. I’ve heard of companies borrowing to make payrolls, or buy new equipment. I’d just never heard of banks borrowing so they could make more loans. Of course, assuming they continue to service (collect payments) on the loans they sell, they have to forward most of those payments to the new owners of the loans, so that portion of their income is no longer available for lending.
As I wrote this, I came to see that “selling debt” could also be given another meaning. It could also be seen as selling people – governments in particular – on the idea that they should borrow money in order to do things. They shouldn’t save, they should borrow. You shouldn’t “wait until you can afford it,” you should buy it right now, do it right now. With governments, this is particularly pushed as a way to finance wars. Every major war I am aware of was financed with debt – the taxpayers (via the government) borrowed money from banks, then had to pay it all back afterwards. It is a potent way to “make money” in a short amount of time. I don’t know, however, if it really accomplishes anything over longer periods, especially if it involves making war.
Fractional Reserve Banking
Some people believe that this is a new idea. But it is really just a newer term for an old idea. According to Google’s Ngram viewer, the phrase first appeared in literature around the turn of the last century.
As long as banks have been loaning money, they have been using deposited funds (or other assets) to do so. The idea of “Central Banks” was pushed into place after it seemed that unregulated banks had an inclination to dig too deep into their cash. Now Central Banks police what fraction of a bank’s deposits (or cash, to use a simpler term) must be held in reserve so that their depositors will be happy with the illusion that their full deposited balance could be withdrawn at any time. Depositors get to account for their full deposited amounts as “cash,” when in reality only a fraction of that amount is actually available to be paid out from the bank’s reserves.
No one likes “reserves” because they just sit there and don’t do anything. It’s kind of like a having a Fire Department in your town. In a perfect world, they would never have a fire to fight, or even a cat to get out of a tree. In this real world, you need to have one because “stuff happens.” Same goes for reserves.
Some would argue that amounts held is reserve should be quite substantial. It gives stability to an economy, and breeds a certain level of confidence, even a certain willingness to take risks. I think there is validity to those arguments. But that does not mean banks need to keep 100% of their “on demand” cash deposits as reserves. This is discussed more below.
The beauty of a cashless system (in the eye of the banker)
In the “old days” money meant gold coins, or ingots of silver, or other precious metals, or gems. Today it can be reduced to a code in a bank’s database. Money (currency, really) had to be manufactured, transported and stored when not in use. Meanwhile, businessmen had grown used to account books, and moving larger sums around using bank drafts instead of currency. This began the move away from “hard” money. The “softer” the money, the easier it was to handle and move about. Banks and their major customers really liked these benefits. And so, national currencies were pushed into place, the use of paper money was greatly expanded, and finally computer systems were developed that just require an ID card to access account records.
Global-scale electronic funds transfer systems now exist, and are very widely used. All accounts at all modern banks are computerized. Banks are now relieved of the problem of having to store precious metals in their vaults, though “modern” money can still be stolen. To the extent that the world goes cashless, banks and stores are relieved of the problem of securing their on-hand currency, and only have to worry about their computers, which can be locked away in their now-empty vaults.
So, what’s so good about cash?
However, the credit or debit card holder now has to worry about the security of his electronic transactions. I once had a bank make a $2,500 error in my favor. They never bothered to correct it, though I told them about it more than once. For them it was insignificant, but that’s a huge amount for me. What if my account suddenly one day had $2,500 less in it? They better be able to correct that!
In a secure and honest world, using a card instead of cash (currency) would be a great way to go. In the world as it really exists, I want to be able to fall back on coins and paper money. If a store’s electronic payment system goes down, I want them to accept my cash. If I need some water out of an old-style vending machine, I need some coins or I go thirsty. If I want to tip a waiter, it’s easier for me to think with using a couple of extra bills.
When money is a commodity, then you can’t have some unless you earn it or physically steal it from somebody. When money is only a number in a database, what happens if I can’t get access to that database? And what happens if someone can get illegal access to it? Or in some other way fiddle with accounts just by making some entries in a computer program? It gives the tech-savvy an advantage I’m not sure they’ve earned. The cashless ideal includes a reliance on technology that is not necessarily as reliable as I need it to be. At the business level, if a transaction gets fouled up, it can be fixed later. At a personal level, it could mean the difference between staying fed or going hungry.
I’m not advocating a return to cash necessarily, though we might be forced into it should the electronic funds transfer systems stop working. But I am pointing out that our turn away from cash did not handle the most important problems we have always had: dishonesty, thievery and avoidance of real productive work.
Reality Check
My original concept of how this scam works was simple, but incorrect:
The bank has my $100. I thought this meant it could loan out $1000. That’s not exactly right. It is only allowed to loan, maybe, $90. Except, that loaned money is going to end up in another bank account, and then about $80 of that could be loaned back out. That whole cycle can be imagined to repeat maybe 5 or ten times. Now a lot more than my $100 has been loaned – deposited – and re-loaned. That’s what people call “creating money.” I discuss this more below.
The other part of my perception of what was wrong with this system was the cashless nature of modern transactions. This possibly provides more opportunity to “fiddle” the system. If you have to provide a borrower with real currency to complete a loan, then if you run out of currency, you can’t make any more loans. If you only have to credit an account on a computer, then you don’t need the currency. So, who’s to stop you from just pumping out loans? Your accountant, if he’s honest. Or a regulator, the next time you get audited. So the real point here is that the removal of hard currency from the system, reducing it all to numbers in databases, has a tendency to degrade the underlying concepts of what money is and represents. It should represent real value, real productive work. You should not be able to “fiddle” it into existence when you have done nothing to earn it.
Interest
I originally linked this trend towards a cashless system to the decline of interest rates, close to their total disappearance. I have a problem with interest because I don’t think most of the explanations for it are correct. It is often described as a payment to the lender based on the risk he takes by loaning money. But what about the risk the borrower takes in borrowing money? And what about loans between friends or relatives? I think the banks just decided to shift the paradigm because they had the power to do so. Look at interest rates on savings accounts, for instance. It used to be recognized that the depositor was actually making the bank a loan, and should earn interest on his unused balance. But depositors had no way to enforce that idea on bankers, so gradually interest payments on savings accounts have reduced to almost nothing.
The abandonment of the use of interest rates to control inflation in certain markets, and the subsequent increase in the supply of money in those markets, are bits of history not totally explained by the factors discussed above. Though the smaller banks that overextended themselves before the Great Depression could be blamed for what happened, I think that blame would be misplaced. They, however, felt the brunt of new banking regulations, while at the same time, what was to become a huge boom in the mortgage markets can be traced back to those times. I think there remains an untold story (at least it hasn’t been told to me) about how that all came about and about what is unfolding today. My concern is that we will strike out at the wrong targets (called misidentifying root cause where I work) and simply prolong our agony as a result. Benefiting from the suffering of others has never been an honorable way to gain status in a society. Yet suffering continues while a few grow unbelievably rich. Until we begin to apply more effective solutions to problems of finance, the economy, and politics, we will continue on our slide towards a non-sustainable system that will eventually totally break down.
Credit:
I relied heavily on an article written my Kenneth Ballard here:
to get an explanation of how banks account for the loans they make.
I don’t know much about this guy, but he seems to know what he’s talking about…I wish the subject were easier to understand. I have had a terrible time trying to do so…
Wow! Mr. Ballard has responded with corrections here:
According to the Federal Reserve’s own website:
“Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. … Depository institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks.”
Notice that this says nothing about loaning money. The “reserve requirement” is a fraction of total monies on deposit. So, that means the rest of the monies on deposit are available to loan out. I think the first stumbling block here is the term “deposit liabilities.” Who, who isn’t accounting trained, knows what this really refers to? It’s like two conflicting ideas in the same term. This goes back to the fact that there are two balancing sides to every transaction. When a bank receives money from a depositor, it’s not a gift, but on the other hand, the depositor gets nothing in return, except a receipt. As the reference I cited at the beginning states, in the “old days” that receipt acted as money. Nowadays, the fact that a person has money “on account” gives them the right – or ability – to buy things with it.
The depositor counts his bank balance as cash – as a liquid asset. He can do this because there is an implied promise (perhaps written somewhere) that the bank will pay him back “on demand.” More realistically, the depositor has loaned the bank some money for its use. But there is no formal loan contract, as would be the case if the depositor had purchased a CD or a bond. So the depositor is encouraged to not think of his deposits as “on loan” to the bank. However, that is closer to the actual situation. I think this difference between perception and reality is what some people object to. Yet, if the banks do a good job, no one will ever know the difference.
It could be argued that banks should be more honest about what they are doing. It would probably better reflect how they actually operate if they sold bonds or CDs to anyone who wanted to maintain a significant balance with them. Or to make them a “member” like the Credit Unions do.
Private individuals are never going to fully realize that a portion of their deposited funds is being loaned to others unless the way their account at the bank works actually makes that clear. In the past it has been a workable system in spite of this. But since interest rates collapsed, more and more people are questioning it. The “multiplier effect” would still work, but perhaps the banks should be made more responsible for both the positive and negative aspects of it. Having to “insure” bank accounts is not something that should be necessary. If the banking system were more honest with the public about how it actually operates, I think the public would support it – especially if it resulted in real economic growth at the local level. Right now something is suppressing that growth. Questionable ethics levels in the banking community does not help matters any. The banking system has a lot of power to do good in society. Or harm. It is not currently demonstrating the good side of that power.
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