Complacency solves nothing.

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Complacency may be the greatest enemy of liberty we face.  We lose our liberty, freedom and prosperity a little at a time, and too many of us just accept it as the way it is, and there’s nothing to be done about it, other than to complain to our friends and family.  We may get on a soapbox about this issue or that, but rarely take active steps to affect change on our great country.  It is an unfortunate effect of living in a representative federal republic.  We select those who represent us locally, at the state and national levels; we expect the to look our for our best interests but to many Americans that’s where their personal responsibility ends – in voting.  There is a lot of pride in voting; in believing that you have done your part in our system of government.

Your personal responsibility does not end there, it’s just the beginning.

In complacency we accept what is given to us, whether we agree or not.  In complacency we do a disservice to ourselves, those we care about and future generations.  It demonstrates our cowardice; it says that we are afraid to take risks, afraid of being ostracized, afraid of the consequences.  But the consequences we face may pose a greater danger than the risks we take.  Our founding fathers understood this.  They knew that someone had to stand up against tyranny, and to do so would put them at great personal risk.  But they did it.

What was so different about them?  We would argue not much.  We believe that the spirit of liberty resides within all of us; the understanding of our natural rights and the importance they are to the human condition.  We want a better future for our children than the lives we’ve experienced.  Does any of that sound that different than what we understand of Jefferson, Paine, Washington, Madison, Adams and even Hamilton?

The alternative is and must be activism.  To some this stops at voting; to let their voice be heard in the political process of our country.  But for change to occur, it cannot always be the responsibility of someone else.  At some point the people need to stand up and say “we’re not going to take this anymore.”  When a sufficient number of us does so others will notice, just like they did when our States seceded from Great Britain.  It was loud and brash statements of liberty, of freedom and a call for independence that finally gained support throughout the colonies and made this great experiment possible.

By helping others see the vision of a United States that is again truly free, where your natural rights are protected from the government by the Constitution is what we strive to accomplish.  To again live in a country where you own your destiny, where your government cannot oppress you and you are entitled to the fruits of your labor are ideas that everyone should embrace, and we posit they will when exposed to them.

Once you have lifted the blinders from your eyes there is no going back.  Once you embrace the ideas as originally laid our by the Declaration of Independence, the United States Constitution and the constitutions of the Several States you cannot return to complacency.  You will work to change one mind at a time, and realize you are making an investment in your future and that of future generations.  You will realize that that by attacking complacency in yourself and others change is not only possible, but inevitable.

The Liberty Amendment proposes meaningful change to our Constitution, to right previous wrongs, to limit the Federal Government’s ability to oppress our citizens and deny them the natural rights that they have sworn to protect and to provide a sound economy where your success mirrors the success of the country.  We cannot afford to be complacent, we can no longer sit on the sidelines.

We challenge you to change a mind today.

 

Fractured Reserve Banking.

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We’ve posted a number of times on the public-private collusion that make up our monetary system through the Federal Reserve and the Department of the Treasury.  You know that our dollar is not backed by anything but debt, and through this the federal government can make up for budgetary shortages by printing money out of nothing when high taxation would be political suicide and the American people will pay for it through inflation; increased prices on everything you buy every day.  You now realize that the monetary system is rigged so that the first to get the money get the advantage (banks and the government) and the further down the chain you are from that first influx of new cash the more inflation you will see.  You now realize that through this system the buying value of the 1913 dollar (when the Federal Reserve was created) now has the buying value of less than a nickel.  A loaf of bread should not cost $2, it should cost 10 cents.  That formula can apply to almost everything you buy, except that through technological innovation and increased productivity that loaf of bread should cost even less.

Another culprit that has been fought throughout history that we (through pressure from the banking system) now thoroughly embrace is the system of fractional reserve banking.  Most people believe that when they deposit their paycheck into their bank that money (or digital representation of money) is stored in a vault, waiting for you to spend it.  Perhaps you have a certificate of deposit (a CD) that allows the bank to loan your money to enterprising entrepreneurs to start or grow a business – but when you want to withdraw all of your money it will be ready for you.  It’s a bank, and they hold your money for you – making loans to others to make money off of interest, and perhaps you get a percent or two of interest for you providing your money to them as capital.

This is not the case.

Fractional Reserve Banking does not work this way at all.  Fractional Reserve Banking simply means that a bank must keep a “fraction” of your deposit at the bank betting against the unlikely event that everyone withdrew all their money at one time – what is known as a “bank run”.  This would occur if the depositors lost faith in their bank, and demanded their money back all at one time.  But if people simply withdraw their money from time to time in small amounts – to pay their bills for example, they can loan out the larger part of the fraction to people who wish to buy a car, buy a house, a new business or any other loan.  The bank then begins to receive a profit from your money – it is earning interest on all of those loans.  Everything works fine as long as everyone does not want all their money at once.

You may be surprised to learn that your bank in reality only has less than 10% of the money that you deposited really available for you to withdraw at any given time.  If you withdraw 100% of your money, they will give it to you – using the cash from your fellow depositors at that bank.  The system continues to work, and no one is the wiser.

The “fractional reserve rate” is set by the Federal Reserve (specifically the Board of Governors of the Federal Reserve System).  In 2011 the formula was this:

 A depository institution’s reserve requirements vary by the dollar amount of net transaction accounts held at that institution. Effective December 29, 2011, institutions with net transactions accounts:

  • Of less than $12.4 million have no minimum reserve requirement;
  • Between $12.4 million and $79.5 million must have a liquidity ratio of 3%;
  • Exceeding $79.5 million must have a liquidity ratio of 10%.

Through the ages bankers have been trying to figure out how exactly they can make the most money out of banking – that should not come as a surprise. For good, sound banks throughout history they maintained 100% reserves – meaning they had 100% of every depositor’s money available if they wanted to withdraw it – every single depositor could take all of their money out at once and no one would get the short end of the stick.  These banks charged their customers a service charge to hold their money each month.

If depositors would agree to time-based deposits – saying for example that you would deposit $10,000 and agree that it would not be available for withdrawal for 3 years and you would receive 3% interest on your deposit the bank could turn around and lend that money out.  For example, the bank could loan someone your $10,000 for 3 years and charge them 5% interest (maybe for a car).  The bank would make 2% profit on this arrangement – they would receive 5% interest on the loan from the borrower, pay you 3% of it and keep 2% to pay their employees and pay their bills and contribute to their bottom line.  This is honest and profitable banking.

But for some bankers that wasn’t enough profit.  They wanted a system where they could make more loans and receive even more interest and fractional reserve banking provides them with the mechanism to accomplish it.  We’ll use our example above to demonstrate how this works:

You deposit your $10,000 in a regular checking or savings account – not a CD that keeps you from withdrawing it – you are told you may withdraw all of it at any time.  We’ll say the fractional reserve rate for the bank is 10% (in reality the highest it could possibly be in the US, so this is the worst case scenario).  That means the bank can lend $9,000 of your money in loans, and let’s say that it makes a single loan of $9,000 at 5% interest.  The loan is made, and every month the borrower makes his loan payments, consisting early in the loan of mostly interest and a little bit of principal.  We won’t go through the exact math, but let’s say that the first payment is $300.  That money comes into the bank – and becomes part of their fractional reserve requirement.  The bank now has $270 available to loan – because they only need to keep 10% (fractional reserve requirement =$30) and the remainder is available to make new loans.  As you can see, this process happens over and over and over – on average about 9 times at a 10% fractional reserve requirement rate.

What you need to ask is where does this new money come from?  Your $10,000 is actually only $1,000 in the bank (10% fractional reserve requirement) yet the bank has lent out $9,270 that it is making them interest and probably paying you nothing on your deposit, or a fraction of a percent?  Fractional reserve banking allows banks to create new money by creating new debt – as long as their loans increase, their base of lendable money increases to infinity.  Banks can truly become to big to fail, because they are not forced to hold their deposits in an honest way – to keep the money that depositors make on hand to be returned when demanded.  As long as this cycle continues and not everyone (or a large percentage of people) want their money back at the same time they can continue the system and make money off of their interest – off of loans made on money created out of thin air.

If enough people wanted to test this theory they could organize all the depositors at a single bank and decide to withdraw all of their money on a given day.  This “bank run” would close the bank immediately – the exact effect that the Federal Reserve Act was sold to us to keep from happening.  But would the bank close?  No.  Banks could borrow from other banks and always have “the lender of last resort” – the Federal Reserve itself.  If the bank could not borrow from other banks to continue operations it would turn to the Federal Reserve who, as we have learned, would create the money out of thin air, simultaneously inflating and deflating our currency and keeping a bank that no one trusted in business.  ”Too Big to Fail” is not a result of rampant free market capitalism, it is the result of fractional reserve banking and the Federal Reserve Bank cartel in collusion with a federal government that’s needs can no longer be satisfied to taxation.  Our politicians are betting that the United States is too big to fail, and this same system will keep us from facing the results of our unbalanced budget and staggering $16 trillion dollar plus debt.

Fractional reserve banking has been attempted time and time again throughout history, and has failed every time – with the depositors suffering the brunt of the failure.  To tie in our post of moral hazard the Federal Reserve Act also led to creation of the Federal Deposit Insurance Corporation, to “insure” your deposits up to $250,000.  How can that work?  Ironically the FDIC works of a fractional reserve method too – meaning they truly could not handle many bank failures, only a few.  This reserve is made up of required payments by banks, but cannot truly insure.  It is another method used to make you believe your money is truly safe.  It, quite simply, is not.

The Liberty Amendment addresses this issue through making the practice of fractional reserve banking unconstitutional; not leaving it to politicians in Congress and the White House who receive staggering contributions from Wall Street.  We further strengthen our financial system by requiring all money be backed by something of value such as gold or silver and not backed by debt.  We require that the Federal Government shrink in size to the point it can operate based on it’s honest income – through state contributions, tariffs and other means, not just through a federal income tax (which we also hamper through repeal of the 16th Amendment).  Finally with eliminating the “lender of last resort” – the Federal Reserve Banking System we require that banks operate honestly with your money and ensure our country is again positioned as the strongest, most innovative and freest economy in the world.  We will lead through good example, and other countries will follow. We must fight for this – we must do it for our own futures but those of our children and future generations.

What about our children’s education?

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When we discuss drastically shrinking the amount of money that flows directly to the Federal Government (directly through repeal of the 16th Amendment, Sound Monetary and Banking Requirements and the Balanced Budget Requirement and indirectly through repeal of the 17th Amendment, and Nullification) we hear a common refrain – “but how will the government educate our children?”.

At face value we should question that question.  Since when has the role of educating K-12 been the responsibility of the federal government, and not the responsibility of the family or community?  And now that the Department of Education has assumed that role, how good a job do they do?

In early America there were plenty of schools and means of education.  What was different was that education was not thought of in the way it is today – that it was the role of the parent to provide basic education, and further education through apprenticeship, higher learning, etc. would be decided and chosen by the family.  To quote Thomas Jefferson “It is better to tolerate the rare instance of a parent refusing to let his child be educated, than to shock the common feelings and ideas by the forcible transportation and education of the infant against the will of the father.”  Nonetheless states established public schools in the early to mid 19th century; originally to provide education for the poor and by 1850 attendance was only compulsory in Massachusetts and Connecticut.  This reflects the individualist mentality of our country; that choice in most matters was best left to the citizen, not the government, and that compulsory education was literally a transfer of rights from the individual to the state.

The “Educationist” movement none the less gained steam, and many still opposed it due to the statist goals of the organizers.  Of primary concern was to teach obedience to the State, and to further the socialistic goals of the organizers.  As often with government programs best intentions have not lead to best results, and of course a host of unexpected negative consequences.

For an excellent treatise on this subject consider checking Murray N. Rothbard’s piece entitled “Education: Free and Compulsory”

http://mises.org/daily/2226#9

But how have we done with the Department of Education dictating how our children are educated?  While school districts are local, they will not receive federal government funding unless they follow DOE rules and guidelines.  This chart by the Cato Institute shows it clearly:

Cato Analysis of Education Spending

Cato Analysis of Education Spending

For more information behind this chart please see http://www.cato.org/blog/public-school-spending-theres-chart

Despite insisting that the Department of Education is vital and necessary, we can conclude that it has been a dismal failure.  Somehow before compulsory and free education controlled by the Federal Government we turned out some of the brightest minds in the world, including our founding fathers and constitutional framers.  It makes one wonder what our test scores would be like if we left educational choices up to parents and the local levels of government.

The Liberty Amendment seeks to put a stranglehold on funding for inefficient and potentially dangerous federal government programs.  The requirement of a balanced budget and sound money alone eliminate waste and ensure that the few enumerated powers constitutionally granted to the federal government are performed efficiently while leaving most decisions to the citizens and when necessary the sovereign states. This leaves more money in your pocket to education your children as you see fit, encourages competition in education driving prices down and will lead to more opportunities for coming generations.

Disgruntled States

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We are more optimistic than ever of the opportunity to get the States to ratify the Liberty Amendment through a Constitutional Convention.  So far at least 6 States are vowing to nullify current threats to the 2nd Amendment and at least 25 States are refusing to set up the necessary State Insurance Exchanges that represents the cornerstone of Obamacare (with some estimates predicting up to 35 refusing).  The States are increasingly aware of their natural right of Nullification – to refuse to enforce unconstitutional laws.  The Liberty Amendment ensures that Nullification is a States’ Right under the Constitution – this is an important trend that tells us we are on the right track.  An unconstitutional law is not a law at all, and those members of the US Constitutional Compact do not need to follow them – we find ourselves with the right message at the right time.

United States of Moral Hazard.

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A moral hazard is a situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk.  The term originated (most likely) with English insurance companies during the 19th century to describe situations that would be negative to their business, like allowing someone to insure a burning house against fire.  It doesn’t make sense for the insurance company – they would obviously have to pay more in the insurance claim than they would receive in premiums from the homeowner.

Our country has developed many programs that present moral hazards, and legislated whole industries into the realm of moral hazard.

Too Big to Fail

The Federal Reserve has many aspects to it, but we’ll focus on one – the “lender of last resort”.  We saw this play out in the 1980s savings and loan debacle and most recently in our current recession.  When you know there is someone to bail you out if you get into trouble, you will take more risk.  This is what having the Federal Reserve is to financial institutions.  While deregulation is always touted as the reason we’ve seen these crashes it simply isn’t the case.  Deregulation did not cause the savings and loans to make riskier loans, or the Wall Street banks to do the same thing in the 1990s and 2000s.  If banks become insolvent and can no longer borrow from other banks, they will make the case to the government that “to allow a collapse of our institution will cause untold economic disaster not just to us but to the entire system”.  We hear this every single they get into trouble.  And what happens?  The federal government using the Federal Reserve – the “lender of last resort” will step in and bail them out.  What message does that send to financial institutions?  Go ahead and take on riskier loans, hold less money in reserves and make riskier (but potentially more profitable) investments because if you get into trouble you will be bailed out and continue to exist.  Moral hazard encourages bad behavior, and Wall Street knows they always have a safety net (the American public) who will bail them out through taxes or inflation (the “hidden tax”).

This is not the way a free market would work.  The strong and well-run companies survive, while those that make the risky bad bets go out of business.  It happens that way (unfortunately) in small businesses every day.  When a poorly run company goes out of business there isn’t a major shock to the system, or even to the industry.  If they were making something consumers wanted or providing a needed service customers will find another vendor to deal with, and most likely a stronger, better run supplier.  The employees will be out of a job, but suddenly there will be more human capital in that industry – and the best employees will be snagged up by other companies.  The well-run company will be even more productive, increase it’s sales, it’s employment and it’s return to it’s stockholders.  Getting rid of the weak and inefficient companies is what we should strive for; the result are better products and services at lower prices for the rest of us.  Creating a moral hazard skews the market by rewarding the poorly run companies at the expense of the well-managed firms.

Unemployment Insurance and Food Stamps

While no one likes to lose their job, it’s not nearly as bad as it once was.  The government (through payroll deductions) will pay you unemployment insurance until you find work again.  Sounds pretty good.

The moral hazard enters the picture when the amount of unemployment insurance reimbursement and length of time the state will pay increase, as they did under President Obama’s plan following the housing crash.  People hear every day on the news the debate about extending unemployment insurance for another year, and for increasing the amounts in unemployment and food stamp programs – to not provide these would be inhumane and irresponsible they tell us.

Moral hazard enters the picture.  If one person in a two person household loses their job (and let us suppose they have two young children) the family takes a pretty big hit.  But after unemployment kicks in and the unemployed spouse is receiving 60 to 80% of their previous salary, do they really have an incentive to look hard for a job and reenter the workforce?  Suddenly the family is spending half as much in gas for the car every day, the day care expenses are gone, the need to constantly purchase work clothes is lifted.  It isn’t hard to imagine that with very little belt tightening that household being as well off as before, or perhaps better depending on the job.  To pay people not to work does nothing to dissuade people from not to continue to do so for as long as they can, and if our politicians in Washington continue to make that more and more appealing more potentially productive workers will do so.  The net result will be a reduced labor pool, with more money going to those who remain working (a positive) or the potential for more offshoring (because businesses can’t find the qualified workers they need that are willing to work).  Through moral hazard we have increased the number of people unemployed, not put people back to work.  The employed are paying for the unemployed, which no longer just includes the poor, but the middle class.  Where does that leave us as the unemployed grow in size to meet the number employed?

Social Security

Perhaps the most detrimental system we have is Social Security.  By giving our entire workforce the belief that a considerable part of what they will need to retire will be provided by the federal government we have dissuaded people from saving.  Many seniors are finding their monthly Social Security payments not keeping up with inflation, and are not able to live out their lives as they believed they would; many seniors have been forced back to work because they simply can’t make ends meet.  Because the system was flawed from the beginning Washington knew that it could not continue forever, yet we hear from our politicians every day that “it can be saved” and we “will not take away from our senior citizens”.  But that is a lie – it cannot continue forever (or even the foreseeable future) because we have more people taking from the system than we have paying in.  It would bankrupt the company.  Through moral hazard our retiring generations are getting shortchanged.

Washington needs to stop creating moral hazards that rip apart our economy and the fabric of American life.  They need limits – they cannot make promises to get elected and then through moral hazard penalize the very people that got them their job in the first place.  The Liberty Amendment reduces the power for Washington to directly tax us, it requires the Federal Government to stop devaluing our currency so it can spend limitlessly while we pay for it through inflation and requires the books to balance at the end of the year, just like ours do in our homes.  By returning to the vision of our Founding Fathers – a limited federal government that didn’t skew the economy and was responsible with the funds it received from the States we can regain financial stability and offer future generations a better life than we have – that is what we want.

Couldn’t the Liberty Amendment be broken into pieces and passed one at a time?

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Certainly.  But consider the last Amendment to the US Constitution; the 27th Amendment was ratified on May 7, 1992 saying “No law, varying the compensation for the services of the Senators and Representatives, shall take effect, until an election of Representatives shall have intervened.”.

It was presented to the House of Representatives by James Madison of Virginia on September 25, 1789.

The 26th Amendment was passed in 1971.

We are all for getting the Liberty Amendment ratified a bit faster than that.

A US Bankruptcy?

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When people or businesses become insolvent they go bankrupt.  Their income cannot pay their day to day needs, they can’t pay their creditors, they can’t get new credit – they are stuck.  They work through the court system to restructure their debt, some investors get left with nothing and plan is put in place to attempt to get them back to positive cash flow.

What happens to a country in the same position?

The United States of America will face that reality.

Our fiscal future as a country is unsustainable in a number of ways.  Whether you agree with the programs or not, our country has implemented a myriad of social programs, designed to help those in need.  Social Security, Medicaid/Medicare, housing assistance, food stamps, unemployment insurance – the list goes on and on.  And while these were all implemented with the best intentions their costs and unintended side effects have caused them all to be huge drains on our country.

There are two sides to these costs – the direct costs and the unintended consequences.  As an example, let’s look at Social Security.

Social Security was designed to be a retirement account that a worker paid into, and would receive that money back upon retirement in monthly installments.  The intent was to assist people who did not have enough money saved when they could no longer work, and by helping them save along the way they could enjoy their retirement and final years.  The key problem from the beginning was inflation – that prices would rise and the difference between contributions and withdrawals wouldn’t add up through annual cost of living adjustments.  Additionally Social Security started out absolutely in the red – the first generation of retirees received much more than they had ever paid in.  While the Baby Boomers contributed significantly to Social Security, later generations were having smaller families, and thus fewer workers paying into the system for a growing retiring population.  These facts are all well known, yet we are led to believe that “Social Security can and must be fixed” and that despite predictions for it’s demise somehow retirees are still getting their checks today.

Social Security has been described as a Ponzi scheme for a good reason – that’s exactly what it is.  A Ponzi scheme involves taking the money of new investors to pay off the returns owed to earlier investors – sound familiar?  The myth that your Social Security contributions go into a trust fund has been around for years (remember Al Gore’s “lockbox”) but it simply isn’t the case.  Your contributions go to the Federal Government, who then issues the Social Security Trust Fund an IOU – and then uses your contribution as part of the government’s general funds.  Money paid out in Social Security benefits is nothing more than today’s taxpayers paying the monthly checks to those who are no longer working.  Because of the increasing costs of living, fewer contributors due to smaller families and our growing size of government this became unsustainable long ago. Yet no politician is willing to cut payments to the elderly, and the Federal Government makes up for the shortcoming through raising taxes, printing money and borrowing.

The unintended consequences of Social Security are equally disturbing.  Since we went off the Gold Standard the Federal Reserve has been playing more and more with the bank interest rates, attempting to keep credit attractive (as through interest banks make money) by lowering interest rates.  While we see extremely low rates to borrow we also see extremely low rates for savings accounts.  No bank in America today pays a rate of return on savings that equals our annual inflation rate – in short, by putting your money in the bank you are guaranteed to lose money – your return will by less than it did when you put it in.  This causes people not to save, and to choose riskier options for retirement – stocks, mutual funds, etc. all come with risk – ask anyone who saw their retirement planning tank in 2008-2009.  We are being dissuaded from saving money – we are encouraged to take risk.  Social Security also contributes to this – with many Americans believing that they can count on Social Security in their retirement they naturally save and invest less than they will need if Social Security is not there when they retire.

In all of our social programs we have inequity – there is more money going out than there is coming in.  Common sense tells us this cannot continue, and we know that through inflation of our money and borrowing is the only way we can make ends meet.  As Americans we see this, though our politicians continue to attempt to convince us that it can all be fixed and they will do it in a way that’s not painful for any of us.  That is a pipe dream.

As we devalue our currency through reckless inflation of our monetary supply, borrow from foreign countries and investors and continue to increase our spending we will hit a point where credit will dry up, our revenues from taxation will shrink (due to more unemployment) and the shortfall will increase year after year.  We publish our budgets and our creditors read them.  America will no longer be seen as a good investment.

We will have to consider declaring the country insolvent.  It would be wise or us to do so and attempt to minimize the damage of others doing that for us, but I’m skeptical whether any administration will be willing to take that drastic step.  If we did we could define our terms for restructuring our debt (some would be left with losses while our most important creditor nations may be made whole), reduce our expenses (by necessarily doing away with many government programs, including cuts to social and defense budgets – austerity) and necessarily raising our revenues through taxation.  Painful yes, but consider the alternative.  While we bail out some of our largest corporations at taxpayer expense (either through taxation or inflating our monetary supply) there is not not enough capital in the world to bail out one of the world’s largest economies.

If we were unable to continue to borrow – if no one was buying US Treasury bonds – the government could not raise taxes enough to pay for annual budgets and interest payments that exceed our GDP.  They would be left with increasing the supply of money – printing more dollars to pay the bills with, which would lead inevitably to hyper-inflation; money not worth the paper it’s printed on.  That would cause a crash of not only our fiscal viability, but raise into question the viability of our society as a whole.  The slope is steep, and we would gain speed on the way down.

No one wants to think that America could slide into being a third world country, but if you look at the facts you will unfortunately realize it is inevitable.  The only question is whether we attempt to get ahead of this or suffer a worse fate.

The Liberty Amendment addresses this.  It requires balanced budgets and ends practices that devalue our currency and cause inflation.  In that simple move the dollar goes from being a currency of questionable value to the only currency with a defined value – backed by gold or silver – in the entire world.  The dollar would again be in demand, spurring foreign investment, causing money to flow into our country instead of flowing out.  Washington would no longer have the printing presses to save their reckless spending.

A suggestion has been brought up that the Liberty Amendment include a limitation on debt – we believe this is a necessary addition and will be included.