Armstrong Economics

Hie

Irrational
Free Mar
That are
03

(J
Ed

Never
Wrong

O
P-,

E
\-\

L. li
Copyright; Martin A, Armstrong A l l Eights Reserved
C o n n e r "Welcome; ArmstrongEcanomics@GMail,G0M

> 2009
(Internationally)

J t m e

3 0 t h

>

M a i l Qsrmenbs a Suggestions t o :
M a r t i n A, Armstrong
FCX F o r t Dix Camp
#12518-050
PO Box 2000
P o r t Dix, B J 06640

PLEASE REGISTER Y0UK EMAIL ADDRESS

FOR A M UPDATE NEWS
ArmstrongEconomics@GMail.COM

Copright Martin A. Armstrong, a l l r i g h t s reserved

This Report may be forwarded as you l i k e without charge. I t i s provided as a Public
Serviceat t h i s time without cost. The contents and designs of systems a r e xn f a c t
copyrighted. At a future date, a book'will be released The Geometry of Time, The
charts are often reproductions of an e a r l i e r p u b l i c a t i o n from 1986 also to be soon
-republished The " Greatest^Bu"ll"- M^
u p-to'-the "4930s
A d d i t i o n a l updating i s underway to complete the Century and i n t o the current tinie,
providing a month to month h i s t o r y of the f i n a n c i a l development of Western Society.
:

The
Irrational
Free Markets
That are
Never
Wrong?

by: Martin A. Annstrcng

Copyright a l l r i g h t s reserved
Former Chairman o f Princeton Econairi.es I n t e r n a t i o n a l , L t d .
& Foundation f o r fcl*.* Utudy o f C y c l e s
here i s a raging war of words where there i s a c l a s h based upon the assumption
that a b e l i e f i n "Free Markets" means the p r i v a t e s e c t o r should be l e f t alone
and that the markets w i l l make t h e i r own c o r r e c t i o n s , w h i l e the opponents do
not want t o hear t h i s f o r i t implies t h a t there should he l e s s government power.
That Is the key word "power" not whether the p r o p o s i t i o n i s correct o r not. Yet
l e t us make no f a l s e assumption- Those who advocate the ""Free Markets" are by
no means advocating t h a t they r e l i n q u i s h p o l i t i c a l power f o r themselves. Both s i d e s
f a i l t o understand that they axe i r r e l e v a n t , f o r no matter what they say, they too
are part o f the system and are subject t o the same n a t u r a l forces o f the free
markets, j u s t as .Communism f a i l e d , so w i l l any attempt t o a l t e r nature.

At the core of the problem l i e s a

serious fundamental flaw - the wrong
assumption t h a t man even has the power
to manipulate s o c i e t y i n any way, shape,
or fccm, that i s meaningful and l a s t i n g .
The r e l i g i o u s r i g h t outlawed a l c o h o l t o
be able t o imprison the I r i s h and I t a l ian Immigrants who were c a t h o l i c , s t i l l
f i g h t i n g the war o f O l i v e r Cromwell and
the

and tha I t a l i a n Mafia c o s t i n g countless

l i v e s i n t h i s new crime war. How many d i e d
making gambling i l l e g a l , and then when tne
state r e a l i z e s i t can p r o f i t from t h i s v i c e ,
suddenly i t become l e g a l .
The same takes place w i t h drugs and make
no mistake about i t , there a r e people I n j a i l
f o r l i f e f o r s e l l i n g marijuana* Look a t the
war raging i n Mexico. This i s the same as the

Puritans. They created p r o h i b i t i o n ,

1

the r e s u l t of P r o h i b i t i o n . You can create

a l l Che s o c i a l laws you want outlawing even
p r o s t i t u t i o n / but i t w i l l not a l t e r the
behavior o f t h e people* Tt w i l l only d r i v e
p r i c e s higher making doing business i n that
area more a t t r a c t i v e t o those who need the
money and nothing i s accomplished i n the
end. We can pretend t h a t we are p r o t e c t i n g
our c h i l d r e n , but t h a t i s nonsense. Making
things i l l e g a l p r o t e c t s nothing for. i f they
want t o t r y i t , they may be .more a t t r a c k e d
because o f the s t a t u s t o prove adulthoodA c l o s e look at the young black c u l t u r e
i l l u s t r a t e s t h a t being charged f o r sane s o r t
of offense i s a badge o f honor*

The neoconservatives symbolized" by

Dick Cheney and B i l l K r i s t o l , ace a l s o now
d i s c r e d i t e d . The Times of London d e c l a r e d
"the end o f an i d e o l o g i c a l era i n Washington."
The Canadian Toronto Globe and H a i l pronounced
t h a t t h i s i d e l o g i c a l branch i s " d e c i s i v e l y
wiped out." Even Kenneth Adelman lamented i n
the Hew York Tiroes Magazine, "most everything
we ever stood f o r now ... l i e s i n r u i n s , " Vet,
here toe, the very i d e a was b u i l t upon the
f a l s e assumption t h a t they can r u l e the world
and f a i l t o comprehend t h a t there i s one and
simple r u l e t h a t governs a l l :
A l l t h i n g s c o l l a p s e from i n t e r n a l
s t r u c t u r a l weakness.

He can outlaw sex before marraige, but

we are d r i n k i n g our own bath water t o t h i n k
t h a t i t w i l l have any e f f e c t - I t I s l i k e
the R e l i g i o u s Right -who under George w Bush
stopped providing condoms i n A f r i c a t o help
reduce a i d s r e p l a c i n g i t w i t h preaching
abstinence. Right!

The neoconservatives began as Democrats,3n

the 50s but i n the 70s they argued against any
disarmament i n p u r s u i t o f peace and they were
against a f f i r m a t i v e a c t i o n as w e l l i n p u r s u i t
of r a c i a l e q u a l i t y by force. They viewed t h a t
pursuing such p o l i c e s would undermine the
very o b j e c t i v e s . Domestic p o l i t i c s thus had
attacked the Great S o c i e t y programs o f the
1960s. E v e n t u a l l y , t h i s evolved i n t o a key
economic conservative movement t h a t produced
l a d y Margaret Thatcher whose famous phrase
was t h a t s o c i a l i s m works u n t i l you run out
of other people's money. T h i s manifested I n t o
the accession o f Ronald Reagan i n 1961. and
indeed the budget was balanced under B i l l
C l i n t o n who had himself declared "the era of
b i g government i s over."

We Must Be P r a c t i c a l
Economics i s no d i f f e r e n t . I f we can't
he reasonable and p r a c t i c a l , forget i t - We
can f i n d no example t h a t those who claim
t h a t " f r e e markets" don't work and we must
c o n t r o l a l l aspects o f the economy by the
s t a t e , a r e i n any way c o r r e c t . Both China
and Russia adopted the same Marxist theory
and demcnstrated t h a t a c e n t r a l l y planned
economy cannot be achieved.

The f o r e i g n - p o l i c y branch of the o r i g i n a l

neoconservatives e v e n t u a l l y followed i t s own
path where the economic conservatives became
mainstream, the f o r e i g n - p o l i c y branch became
v i r t u a l l y the nut-jobs. This group was the
much more passionate and l e s s l i k e l y t o l i s t e n
to anyone on the opposite side. This i s the
branch steeped i n McCarthism and communist
witch-hunts. They had zero-tolerance f o r any
ccfLfrunist and destroyed t h e K t r s t Amendment
t r y i n g t o make i t i l l e g a l t o even belong t o
the American Communist P a r t y . As a k i d , I
remember the d r i l l s i n grade school o f ducking
under your desk. These were things t h a t mads
k i d s b e l i e v e they were l i k e the e v i l w i t c h
i n the Wizard o f Oz. Communists would take
you t o a gingerbread house and then eat you.

The Marxists today have j u s t changed

the l a b e l s hoping t o give i t another shot.
They now c a l l themselves "Progressives"
and t h i n k hy renaming the p i g , i t w i l l make
i t magically a horse.
At three o'clock i n the morning, they
added a 300 page amendment to the energy
b i l l * Why wait so long? Because they d i d
not want the people t o know what they were
doing before they acted. That i e not what
one c a l l s a free democratic state* I t i s
more l i k e an a u t h o r i t a r i a n d i c t a t o r s h i p
basking i n the g l o r y of i t s own tyranny
and d e l i g h t i n g at i t s own applause.
The Republican " f r e e market" advocates
use the term, but stay f a r away from i t s
r e a l meaning. They advocate freedewi, hut
s e l l i t t o the highest bidder. I t i s a t r u e
disgrace hew Goldman Sachs has c o n t r o l l e d
the US Treasury and World Bank f o r so long.

Most o f the neoconservatives of the

f o r e i g n - p o l i c y wing were hawks (with few
exceptions). Where the domestic economic
issues i f wrongly decided would leave you ~
2

bankrupt, a m i s c a l c u l a t i o n i n the f o r e i g n p o l i c y wing would create war. The stakes no

doubt were higher, yet there was s i l l a t the
core, the f a i l u r e t o understand what "Free
Markets" r e a l l y meant.

Khrushchev symbolized everything feared by the

neoconservatives and when Khrushchev vowed
that Communism would conquer the United States
from w i t h i n , they had t h a t bcogeyman and no
doubt looked under t h e i r bed and i n the c l o s e t
before going t o bad.

The neoconservatives of the f o r e i g n p o l i c y wing became the extremists. They were

separate from the neoconseivative domestic
wing t h a t became mainstream, and thus the
whole neoccnservative movement became the
power behind George W. Bush and organized by
the Dark l o r d Dick Cheney who r e a l l y ran the
White House even t a k i n g P r e s i d e n t i a l funct i o n s tot never before were c o n t r o l l e d by
any V i c e President, H i s i n s i s t a n c e upon s t i l l
h o l d i n g press conferences on f o r e i g n p o l i c y
i l l u s t r a t e s who was r e a l l y i n charge at the
White House.

Yet when Communism f e l l i n T989, there

was no a y e l p o f v i c t o r y , but a sense of sheer
and t o t a l shock. Where was the enemy? Gee, we
didn't have t o nuke them? I t was not t h e i r
v i c t o r y . Seme t r i e d t o c l a i m v i c t o r y by the
Star Wars p r o j e c t that somehow pushed the
Russians over the c l i f f . Now, P u t i n argues
that the f a l l o f Russia was a CIA p l o t t o
undermine t h e i r economy no d i f f e r e n t that the
Iran government i s blaming the r i o t s on the
B i t i s h and Americans. Nobody, not even the
neoconservatives, w i l l admit that the very core
philosophy i s j u s t dead wrong.

The neoconservatives saw the l o s s i n

Vietnam as a product of l i b e r a l i s m . They,
demonized Communism and believed i n zero
tolerance. Their a t t i t u d e was viewed as
pure American Imperialism and they became
f i r m l y entrenched i n the Republican^ caap
following Jimmy C a r t e r who took t h e p o s i t i o n
t h a t they possessed an " i n o r d i n a t e f e a r o f
Communism. '

The neoconservatives needed an enemy. They

had a vested philosphy, and w i t h the c o l d war
gone, they needed someone. I t was dying and
i t was not due t o i t s own success, but t o a
Fiam Market* success they f a i l e d t o understand.
m

They were saved by the Saddam Hussein

i n v a s i o n . The c o a l i t i o n put together and l e d
by President Bush, Sr, was p r a c t i c a l and o f
course d i a b o l i c a l l y opposed t o the v o i c e and
p o l i c i e s o f the neoconservatives who were
simply l i v i d - b r i g h t red w i t h sheer and
u t t e r contempt f o r stopping shy o f t a k i n g
Baghdad.. I p e r s o n a l l y discussed t h i s i s s u e
at the time w i t h former Prime M i n i s t e r Lady
Margaret Thatcher. The p o s i t i o n was that
Saddam kept the r e l i g i o u s nut-jobs i n place
and provided a b u f f e r t h a t was necessary then
against I r a n a f t e r the Islamic Revolution.
The neoconservatives, wanted t o wipe out
Saddam. They had to-win something I

They managed t o i n f l u e n c e President

Reagan enough t o a t l e a s t have him demonize
the Soviet Union as the " e v i l e n t i r e " yet
he would not adopt t h e i r p o s i t i o n o f such
absolutism. The neoconservatives became the
" z e a l o t s " and a. f r i e n d o f mine who was t h e
campaign manger f o r Reagan i n Pennsylvania
was no neoconservative, but believed t h a t
they Could be tempered and c o n t r o l l e d . I ,
on the other hand, warned t h a t they could
not be t r u s t e d .
Their l o a t h i n g o f Communism i s what
drove them. They could sea nothing from a
pure economic standpoint, nor would they
understand t h a t t h e "Free Markets" would
s e a l t h e i r own f a t e * Yes, I knew G i l l K r i s t o l
and took the back page of h i s magazine f o r
a long-time t o f u r t h e r economic conservatism,
yet we never agreed on f o r e i g n - p o l i c y areas.

Whether there was ever any genuine deep

concern f o r human r i g h t s i n the major camp
of the neoconservatives I p e r s o n a l l y doubt.
Jiinny C a r t e r had taken a p o s i t i o n that human
r i g h t s may be v i o l a t e d regardless o f the type
or form o f government. The neoconservatives
masked t h e i r r e a l goals clothed i n the f l a g
of human r i g h t s pretending that Communism and
d i c t a t o r s h i p s v i o l a t e human r i g h t s , but not
democracy. This much they s o l d t o Reagan, and
then i n 1984, a l t e r e d human r i g h t s domestically
s t r i p p e d Americans of t h e i r r i g h t t o t r i a l
by j u r y t h a t took u n t i l ftpprendi v Mew J e r s e y ,
530 US 466 [2Q0D> i n the aiprerae Court t o
admit, yet has s t i l l f a i l e d t o c o r r e c t .

The neoconservatives found Richard

Mixon, Gerald Ford as f o r e i g n p o l i c y l i b e r a l s
and they ware never pleased with Henry K i s s inger, who viewed the Soviets as a great power r a t h e r than some s o r t o f a e v i l empire
who would underadne America. The famous k i t chen c o n f r o n t a t i o n between Nixon and N i k i t a
3

yet scsnehow s t i l l l i v e together as i f you

are l u r r i e d ? They disagreed w i t h the f i r s t
I r a q Mar and manufactured excuses bo do
what they wanted. They had an agenda t o
throw Saddam out o f power regardless of
the f a c t . When Bush was asked d i d ha f i r s t
consult with h i s f a t h e r ? Bush r e p l i e d : " I
consulted w i t h my f a t h e r above!" I f God
responded, t h a t says i t a l l f o r the p o s i t i o n
o f the necconservatives - they are j u s t as
a d e f i a n t nut-job as the people they face
in Iran,
The search f o r weapons o f mass d e s t r u c t i o n
gave way to we are defending human r i g h t s
while abandoning that f o r our own people,
and b r i n g i n g democracy t o the Middle East,
I f a i l t o see where Russia could not have
claimed the same slogan "We are b r i n g i n g
e q u a l i t y and peace t o the American people
with Ccmmunismi" Both seem t o be mythical
formulae o f invocation o r i n c a n t a t i o n of
plain bullshit.

Former V i c e President P i c k Cheney

L i k e the neoconservatives i n Germany,
once a f o r e i g n enemy disappears, they w i l l
always turn against t h e i r cwn people. When
Reagan came t o o f f i c e , there were o n l y at
the time 24,363 prisoners i n theFed system. .
The image o f p r i s o n was one of v i o l e n t and
major murderers- Once the c o l d war was over,
by 2002 the reforms they ushered i n l e d by
the Republican Neoconservatives reached a
staggering 163,528 and most were suddenly
nonviolent. Even the s t a t e s followed s u i t
and between T985 and 2002, the females i n
prison rose frem. =19,077 t o 76,817, By the
time we passed 2000, population rose into
the m i l l i o n s . Martha Stewart d i d time f o r
" l y i n g " t o federal agents. She commented
t h a t she was shocked t o meet nuns i n p r i s o n
f o r p u b l i c p r o t e s t s . The number thrown i n
prison j u s t f o r taxes i s shocking. Put now,
the neoconservatives have waged war against
the American people t o such an extent, t h a t
a l s o 6% o f the e n t i r e population w i l l be
locked up f o r something - one i n every 20.
people. Carter has been proven c o r r e c t , i t
does not matter the form o f government, f o r
America i s e i t h e r the most corrupt people i n
the world, o r there i s something wrong i n
the r u l e of law. The u n i t e d States now has
about onethird of a l l prisoners worldwide.

The pretense o f an i d e o l o g i c a l democrat i z a t i o n of the Middle East i s not w i t h i n

American devine power from Gcd o r anyone
e l s e . As f a r as the so c a l l e d War Against
Terrorism, l e t us face the f a c t s . We have
as much chance o f winning such a f i c t i o u s
war as we have i n outlawing p r o s t i t u t i o n
and drugs along w i t h p r e m a r i t a l sex. I t i s
not a r e a l war i n s o f a r as there are two
opposing armies o r even two countries as
the good-old days faced by Russia,
The overwhelming prisoners concerning
drugs are not the manufacturers nor even the
importors. The feds imprison s t r e e t s e l l e r s
for minimum 10 year terms t o l i f e . This has
had no e f f e c t upon the drug trade because
s t r e e t s e l l e r s are e a s i l y replaced. I f you
can't stop the production i n the f i e l d s ,
you cannot stop the drug trade and you w i l l
imprison eventually a l l the poor s i n c e they
s e l l t o make a buck.
T e r r o r i s t s are no d i f f e r e n t . The leaders
do not. f l y i n t o b u i l d i n g s o r blow themselves
up i n cars o r t r a i n s . Those who c a r r y out
such a c t s are not the b r i g h t e s t bulb i n the
box. The ones I have p e r s o n a l l y met, are
r e l i g i o u s z e a l o t s w i t h no r e a l independent
mind. One of the t e r r o r i s t s h e l d at MCC i n
New York, was t i n y and managed t o sneak out
climbing through a g r i d t o the top of the
b u i l d i n g about 22 s t o r i e s high. He was then
found praying expecting God t o take him i n t o
the clouds.

The Cheney white House put the whole

neoconservative philosophy t o the t e s t . I t
adopted u n i l a t e r a l o b j e c t i v e s and would not
form r e a l c o a l i t i o n s , adopting a p o l i c y o f
d i c t a t o r s h i p t o the world f o r they j u s t knew
b e t t e r . They refused t o t a l k t o many states
that was insane. I f you have a f i g h t with
your spouse, do you refuse to ever t a l k again
4

I am personally offended a t Mr- Cheney's

arrogance t h a t water-boarding i s somehow not
t o r t u r e . He has opened the door t o j u s t i f y any
other confrontation t o torture American s o l d
i e r s under the same pretense t h a t t h i s w i l l
save l i v e s of whoever they are. I would l i k e
to see Mr. Cheney demonstrate why i t i s not
t o r t u r e using himself,
to? f a t h e r served under General Patton
i n North A f r i c a , when he found people who
were going t o t o r t u r e and beat Arabs caught
working f o r the Germans he put a stop t o
i t , Re ordered t h a t they b r i n g i n the biggest
pig they c o u l d f i n d . He then treatened the
Arab t h a t i f he didn't t e l l him what he knew
about the Germans, then he would k i l l the p i g
and then the Arab, he would burry the Arab i n
the pig, and he would never go t o A l l a h , He
t o l d me they never had t o tench anyone.
r

The Real Free Market

Smith's I n v i s i b l e Hand

8-J
J_

r e e Markets i s a term often thrown

about, but I have not seen any r e a l
d e s c r i p t i o n o f what i t means. J u s t
to use the term i n v i t e s danger, f o r
i t comes w i t h a l o t o f baggage. I t
Is the very essence o f l i f e i t s e l f and i s
not i n the l e a s t a p o l i t i c a l theory t h a t
should invoke such d i s t a i n among [Democrats
for i f you honestly care about our nation,
our people, and our p o s t e r i t y , then you must
put aside t h e p o l i t i c s and l i s t e n j u s t f o r
once.
1

Before there were p o l i t i c a l p a r t i e s and

there were simply monarch3, the concept of
economics was forming from observation. By t h e
e a r l y IBOOs, the term l a i s s e z - f a i r e emerged
At MCC {Metropolitan C o r r e c t i o n a l Center) to express that the s t a t e should not i n t e r i n New York C i t y , one o f the t e r r o r i s t s from
f e r i n the economic a f f a i r s o f men, and thus
the f i r s t bombing drew a p i c t u r e on the w a l l
to adopt the minimum necessary r e s t r a i n t t o
of h i s c e l l showing the Twin Towers w i t h planes maintain peace and property r i g h t s .
f l y i n g i n t o them more than 1 year before the
event. P r i s o n o f f i c i a l s took p i c t u r e s , and
obviously nobody checked on anything. So, I m
not convinced t h a t Cheney's p o l i c y o f t o r t u r e
5oes anything. A l l you have t o do i s look a t
the c r i m i n a l j u s t i c e system. The pleas In a
Federal court system are 98.5%, f o r i f they
do not p l e a , they get o f t e n twice the time and
t h a t i s again not " t o r t u r e " by Cheney's view.
:

The necx^onservatives have done more t o

make America hated where i t was once respected
and f o r nothing- I t was not the p o l i c i e s of
the neoconservatives t h a t ended the c o l d war.
I t was not the m i l i t a r y build-up nor even the
t h r e a t o f S t a r Wars. Hone o f t h a t has had any
e f f e c t upon North Korea,
The c r e d i t goes t o "Free Markets" t h a t i s
something a l o t more than merely reducing the
r e g u l a t i o n t h a t t h e Democratic Progressives
now r a l e about r e l e n t l e s s l y . They hate t o
l i s t e n t o anyone t a l k about "Free Markets'
because they see t h i s as vehemently the pure
enemy f o r t o them i t r e s t r a i n s t h e i r personal
power to d i c t a t e t o the economy what s h a l l be
done no d i f f e r e n t than the necconservatives
have imprisoned so many Americans f o r nonv i o l e n t offenses t h a t never e x i s t e d before
and have exercised under Cheney i n f o r e i g n
policy.

KARL MARX

The person l a r g e l y responsible f o r the

complete break-down i n our world economy
and i n human r i g h t s , i s none other t h a t the
infamous K a r l Marx (1879-1883) who b u i l t on
Utopian theories t o assume t h a t government
could manipulate the behavior o f mankind.
5

Adam Smith The Wealth o f Nations 1776

The F i r s t True Glijimse o f the Complexity o f The Economy

ountless people have read Smith, but countless f a i l t o comprehend what he

was saying. For anyone t o claim t h a t "Free Markets" don't work, have somehow
been d i s c r e d i t e d by the current economic d e c l i n e , o r seme other excuse as t o
j u s t i f y hew they know b e t t e r than everyone e l s e w i t h absolutely no sense o f
reason, h i s t o r y o r the consequences i f they are wrong, r e v e a l t h e i r own pure
s t u p i d i t y as w e l l as t h e i r arrogance. .Smith had an opponent, the Physiocrats
who l i k e the i d i o t s now, based t h e i r e n t i r e reasoning upon current events
and dare not comprehend how t o walk a f t e r t y i n g t h e i r shoes. The trench Physiocrats had
argued that l a n d was money and thus a man who made a plow and s o l d i t t o a farmer was a
economic p a r a s i t e who created no wealth, but l i v e d o f f o f the farmer who was the only
member o f society t o create wealth. We must understand, the Physiocrats observed a o l d
world of feudalism based upon land and could see not beyond those shores. Hence, the
t i t l e Wealth o f Nations demonstrated t h a t the economy was f a r more complex than t h i s very
simple one-dimensional view o f the world. Smith through observation, saw t h a t a nan who
made a plow and s o l d i t t o a Frenchman and an E n g l i s h farmer s o l d h i s crop t o a Frechman,
both came back w i t h gold i n hand and both contributed t o the wealth o f a nation.
Smith observed without e x p l a i n i n g ,
the t r u e vast complexity of the economy.
He explained t h a t each i n d i v i d u a l a c t s i n
his/her s e l f - i n t e r e s t and that i s what i s
the essence of why the economy i s f a r too
complex t o f o o l with. For t h i s I n v i s i b l e
Hand described by Smith goes much beyond
h i s own observations. They extend not j u s t
to the r i c h and the poor, but i t extends
i n t o the corporate/group behavior, i n t o
the p o l i t i c a l s t r u c t u r e (which i s why the
Democrats say free markets don't work f o r
i t goes against t h e i r p l a n s ) , and then i t
r i s e s t o the n a t i o n a l l e v e l forming the
competition between nations.

Smith saw a glimpse of the o r i g i n of

the econcmy, but he was a t the very f r o n t
o f the l i n e and unable t o see how events
would evolve* This was the beginning of the
I n d u s t r i a l R e v o l u t i o n t h a t would begin t o
s h i f t labor requirement from a g r i c u l t u r e t o
commerce. We must keep i n mind t h a t even by
the American C i v i l War i n the 1960s, we were
s t i l l composed of a work f o r c e that was 70%
a g r a r i a n . By 1929, t h i s d e c l i n e d only t o
about 40% and f i n a l l y post-World War I I , the
expansion i n a g r i c u l t u r a l technology made i t
p o s s i b l e t o reduce t h a t work f o r c e down t o
3% by T9S0. So you see, Smith s t i l l d i d not
see the whole f u t u r e , yet he went a long way.

here might be shock t o most, but the very

idea o f ccamRinism was not purely a r i s i n g
from the dark pieces w i t h i n the mind o f
K a r l Marx. The o r i g i n o f t h i s notion ccmes
from a source predominatly overlooked. To
my astonishment, whenever I would be engaged i n
an interview f o r a job as an a n a l y s t , I would run
down a l i s t of economists and ask what t h e i r view
was of h i s theory. When I came t o Marx, the vast
majority would look a t me w i t h s u r p r i s e . They were
unaware that Marx was even an economist and most
c e r t a i n l y d i d not discuss h i s ideas economically.
There were only a handful o f schools who ever seem
to address Marx i n economics. Of even greater shock
you might f i n d t h a t the o r i g i n of Marx's ideas can
be traced t o S i r Thomas More who disagreed w i t h the
King Henry v T I I , was sentenced f o r treason t o be
"drawn, hanged, and quartered" ( t o r n a p a r t ) , but
was given a downward departure and simply beheaded.
Tt was Thomas Store's w r i t i n g t h a t was known as the
"golden l i t t l e beck" published i n December 1516 t h a t
S i r Thomas More
forms the e p i c center o f our t r o u b l e s . The t i t l e was
(Feb. 7th, 1477 "Utopia" t h a t was a Greek name he coined from the
J u l y 6th, 1535
Greek ou-topos meaning "no place" t h a t was a pun on
the Greek eu-topos that means "good p l a c e . " Mace's famous bcok was a best s e l l e r and thus h i s
"Utopia" meaning "no place" i s w r i t t e n i n contrast t o what he observed. This f i c t i o n a l place
i s a pegan land and a communist c i t y - s t a t e i n which the i n s t i t u t i o n s and the p o l i c i e s of the
government are a l l based upon reasoni
ftore's Utopia was a response t o what he
observed i n C h r i s t i a n Europe t h a t was d i v i d e d
i n t o s t a t e s a l l bent upon s e l f - i n t e r e s t and
greed f o r both power and wealth t h a t he i n
f a c t describes v i v i d l y i n Book I . He w r i t e s
the book as a novel through the mouth o f a
t r a v e l l e r "Raphael Hythlcday. H i s argument
u n v e i l s h i s conclusion t h a t a conmunistic
s t a t e i s the only cure against t h i s unbound
egoism t h a t has consumed p u b l i c and p r i v a t e
life.

s- Although Utopia i s a pegan land, any

punishment f o r a claimed crime i s l i m i t e d t o
reason that e s s e n t i a l l y i s embodied w i t h i n
the B i b l i c a l code f o r crimes - an-eye^foran^eye. What that r e a l l y means i t i s against
the law of God t o i n f l i c t a punishment greater
than the harm. I n other swords, one would not
be sentenced t o death f o r disagreeing with a
k i n g o r t a k i n g an apple because your family
i s s t a r v i n g . Government always v i o l a t e s ;-:the
laws o f God and i n f l i c t s punishments that a r e
f a r beyond p r o p o r t i o n a l reason. J u s t as both
America and A u s t r a l i a were penal c o l o n i e s ,
the s t a t e would punish you f o r the most minor
offense, even s t e e l i n g an apple, by s e l l i n g
you as an indentured servant t o a d i s t a n t land
f o r s e v e r a l years, and when you were f r e e ,
there was no one t o take you back t o England,
Even today, the neoccjiservatives have removed
a l l the r e s t r i c t i o n s upon such power created
by the C o n s t i t u t i o n and have increased the
p r i s o n population by nearly 1000% since 19B7,
f o r nonviolent a l l e g e d crimes i n c l u d i n g taxes.
So i t i s not hard t o see More's sheer lack o f
respect f o r those i n Government. They d i d j u s t
k i l l him f o r disagreeing.

More speaks o f a m i t i g a t i o n of e v i l
r a t h e r than a cure, and accepts t h a t human
nature i s indeed f a l l i b l e . Utopia deals with
penology, s t a t e - c o n t r o l l e d education, divorce
and women's r i g h t s , and r e l i g i o u s p l u r a l i s m .
Tt was t h i s work t h a t gathered a reputation
as being a "HunHnist" f o r Utopia was even
t r a n s l a t e d i n t o most European languages. I t
was t h i s Utopia t h a t created a vrtiole new
l i n e of philosophy, By the time we come t o
Marx about 300 years l a t e r , t h i s Utopian
philosophy becomes not a m i t i g a t i o n , but
the cure f o r everything.

e v o l u t i o n was i n the wind and began i n

1600s t h a t was based p r i m a r i l y upon the
P u r i t a n r e l i g i o u s views t h a t became very
Spartan r e j e c t i n g l u x u r i e s , wealth, and
evolved as a d e r i v a t i v e of Utopianism. What
More set i n motion was a whole concept o f a new land
t h a t could be created. We must r e a l i z e t h a t i t was
t h i s book on Utopia t h a t perhaps I n s t i g a t e d even
Martin Luther by i l l u s t r a t i n g what was e t h i c a l . The
impact o f Store's Utopia cannot be under-estimated.
By 1667, we f i n d the emergence o f a u n i t a r i a n i s m
where one believes t h a t the d e i t y e x i s t s only i n
one person and t h a t t h i s b e l i e f a l s o stresses t h a t
i n d i v i d u a l s have the freedom of b e l i e f t h a t i s the
freedom o f reason even i n r e l i g i o n , and that there
should be a u n i t e d world ccmnunlty w i t h l i b e r a l
s o c i a l a c t i o n t h a t can be expressed as a advocate
of u n i t y and/or a u n i t a r y system.

,
i

Thomas J e f f e r s o n
(1743-1826)
Declaration

"

When ^i^c^^i^c^EaSnn

About 100 years l a t e r , we f i n d the American

Revolution g i v i n g b i r t h to e q u a l i t y by freedon, not
by f o r c e . Thomas J e f f e r s o n expresses the b e l i e f i n
the most eloquent words p o s s i b l e i n h i s remarkable
D e c l a r a t i o n o f Independence. The concept t h a t indeeo
" a l l men are created equal, that they are endowed
by t h e i r Creator w i t h c e r t a i n unalienable Rights,
that among these are L i f e , L i b e r t y and the p u r s u i t
o f Happiness" i s not coextensive with Socialism,
t have w r i t t e n , before, t h a t today i t i s very
hard t o comprehend the t r u e meaning o f these words
that they n e i t h e r advocate conmunism or forced means
of s o c i a l i s m , sumptuary laws to impose the w i l l o f
the s t a t e , nor do they j u s t i f y the tyranny of any
iieoconservatist t h a t wishes to impose a d i c t a t o r s h i p o f sheer i n t o l e r a n c e , We l o s t so much
i n our struggle t o be f r e e , t h a t one wonders i f i t i s ever t r u l y p o s s i b l e , At the time when
those words were w r i t t e n , you were merely the property of a k i n g who could not be i n any
way punished f o r a crime i n another land. That monarch sent you back i n chains t o your k i n g
who owned you t o be j u s t l y punished, j e f f e r s c n argued t h a t we were r e v o l t i n g against the
concept of a monarch and thus anyone t r a v e l i n g to America, was subject to our laws and was
not t o be sent back t o h i s king i n chains. This was a fundamental d i f f e r e n c e and was the
t r u e meaning of "Freedom;" Today, thanks t o the greed More saw i n government, sanctioned by
Marxism, you are once again the property o f the sbate. Whatever you earn anywhere i s the
property o f the United States and i f you dO not produce i t or hide i t o f f s h o r e , you w i l l be
hunted down and thrown In prison f o r you have no r i g h t s - Marxism took them a l l again*
sense o f greed, but i n d i v i d u a l i s m and the
idea of i n a l i e n a b l e r i g h t s t h a t J e f f e r s o n
captures,

This r i s i n g wind o f Revolution swept

most Of the world between the mid T6D0s t o
the l a t e 1700s. This was a t u r m o i l against
the arrogance and corruption of monarchy.
Yet we must not f o r g e t t h a t i t was the
Black Death t h a t put an end to feudalism i n
the 1300s, and as kings began to see wages
earned, i t demanded i t s pound of f l e s h . The
f i r s t tax r e v o l t appeared 13A1 i n England I
led by Wat T y l e r , This i s a period where we
are witnessing the r e b i r t h o f not c a p i t a l i s m
as i m p l i e d by S o c i a l i s t s t o i m p l i c a t e a

By the 1700s, we are developing world

trade and by 1720 we have the f i r s t bubble
o f speculation w i t h the South Sea and the
M i s s i s s i p p i ventures. This i s followed by
the I n d u s t r i a l Revolution and we begin t o
see the migration of labor away from farms
and i n t o f a c t o r i e s . The e n t i r e world as I t
was once known, i s turned upside-down.
3

I
I n order t o understand how these key
ideas emerged and are s t i l l d e p r i v i n g us o f
Freedom and L i b e r t y today, we must r e a l i z e
the economic e v o l u t i o n t h a t was t a k i n g place
between 1300 an 1900. We were emerging from
the Cerk Ages created by the c o l l a p s e of Rome
i n 476AD. The r i s e i n debt and taxes t h a t
began during the 3rd Century of Rome, s e t i n
motion the suburbanization o f c i v i l i z a t i o n
where people migrated away from the c i t i e s .
This eventually gave way t o Feudalism as
t a x a t i o n consumed v i r t u a l l y a l l wealth o f
the i n d i v i d u a l . People s o l d themselves and
t h e i r f a m i l i e s t o "landlords" and Europe
f e l l i n t o a new age o f agrarianism. The
r i s e of the Arabs cut o f f a l l trade by the
c o n t r o l of the Southern European ports and
the sea. The V i k i n g s kept pressure frcm the
North and thus Europe became landlocked. I t
was t h i s i s o l a t i o n frcm world trade t h a t had
created the Dark Age.

So we have Mere observing the s e l f i n t e r e s t of monarchy and-lords r i s i n g based

upon a d e s i r e t o increase wealth and t h e i r
power. We have the Physiocrats l e d by a
trench group i n c l u d i n g Francois Quesnay
(1694-1774) who i s confronted by Adam Smith
(1723-1790) who observes t h a t i t i s the raw
s e l f - i n t e r e s t t h a t d r i v e s the economy i n a
complex manner with i n d i v i d u a l s competing
for wealth c r e a t i n g innovation between them.
This i s what Smith argues creates the wealth
o f a n a t i o n , a l l productive forces.
K a r l Marx (18T8-18B3) comes i n t o t h i s
mix observing the s e l f - i n t e r e s t o f both
Smith and More, and p i c t u r e s t h i s against
the backdrop o f the b i r t h o f the I n d u s t r i a l
Revolution, where he sees the e x p l o i t a t i o n
of labor from h i s perspective as Industry'
i s s t i l l t r y i n g t o f i g u r e out how t o even
create work-shops. Marx sees the Long Lease
that s t i l l p r e v a i l s i n downtown London where
land i s rented f o r 100 years and then returns
to the next generation o f landholders. He
sees t h i s a means of preventing the s h i f t
o f wealth among the c l a s s e s .

The Concentration o f C a p i t a l was thus

exterminated f o r the working population had
been reduced t o serfdom where t h e i r wage was
i n k i n d - about 203 o f the food they had
produced. Indeed, when the monetary system
o f Rome collapsed between 252-260AD, the
value o f money had f a l l e n t o about 1/50th
o f i t s former purchasing a b i l i t y due t o the
debasement o f the coinage ( i n f l a t i o n ) t o
such a p o i n t , t h a t taxes even began t o be
c o l l e c t e d i n k i n d , meaning t h a t the state
would j u s t s e i z e l i v e s t o c k , g r a i n , o r whatever e l s e you had t o pay what i t claimed you
owed. To keep t r a c k o f taxpayers, the s t a t e
invented both b i r t h records and passports
to r e s t r i c t movement t o c o l l e c t taxes.

A l l o f these ideas t h a t have created

the mix-bag o f economic theories we are now
forced t o l i v e with, are s t i l l d e p r i v i n g us
o f our Freedom, L i b e r t y , and the p u r s u i t o f
i n d i v i d u a l Happiness,
The t a x a t i o n of government has t r a n s versed a l l l e v e l s of government and people
can no longer look forward t o simply r e t i r e
i n t h e i r home f o r even i f i t i s p a i d - o f f ,
the taxes continue t o r i s e f o r c i n g them t o
leave c a u s i n g f l i g h t 1 r > F l o r i d a .

From t h i s background, by the time we

reach the 1300s and the Black Death, the
l o s s i n population made labor scarce and
suddenly wages come back and w i t h them the
greed o f the s t a t e - t a x a t i o n . We then have
competition a r i s i n g between these feudal
s t a t e s t h a t are emerging back t o empires
t h a t begin with Charlemagne (742-814AD).
We begin t o see the reverse of the suburba n i z a t i o n t h a t was a migration from t a x a t i o n
under Rome and w i t h t h i s we are are f u e l i n g
the b e l i e f s o f the Physiocrats who believed
t h a t land was the source of a l l wealth. So
here we have the competition an s e l f - i n t e r e s t
observed by More and we have a changing new
world o f s p e c i a l i z e d commerce and manufacture
and trades t h a t Smith sees t o be on a equal
f o o t i n g with a g r i c u l t u r e i n s o f a r as producing
wealth.

The Marxist theory has created a major

change i n s o c i e t y . To pretend that the s t a t e
can prevent economic d e c l i n e s t h a t i t can no
more do than decree weekends s h a l l be r a i n
f r e e , they have created a pemer base t h a t Is
so expensive, i t depletes the n a t i o n a l wealth
and lowers the l i v i n g standard o f the whole.
They are indeed p u b l i c servants f o r they do
not c o n t r i b u t e anything t o the c r e a t i o n of
n a t i o n a l wealth, they consume i t .
The economy was e v o l v i n g throughout t h i s
period between 1300 and 1900. While i t i s
s t i l l e v o l v i n g and the Internet has become
the highway t o d e l i v e r product worldwide,
t h i s i s changing labor needs and people w i l l
f i g h t change, because they do not understand
i t s r o l e i n the progress o f mankind.
9

hat we do not grasp, i s t h a t the economy

i s no d i f f e r e n t than any other complex
system, Tt can he e a s i l y predicted from a
long-term perspective t h a t the present
course o f events w i l l unquestionably lead
t o the d e s t r u c t i o n o f the United States and
Western economies from excessive debt, d e c l i n i n g
r e a l growth, and r i s i n g costs o f government t h a t
s e t i n motion the same col 7apse o f Rome and j u s t
about every other empire.
Nevertheless, w i t h each economic recession and
depression, t h i s i s how the economy evolves. People
w i l l not change v o l u n t a r i l y . They must always be
forced, Margaret Thatcher was c o r r e c t : S o c i a l i s m
works u n t i l you r^n out: o f other people's money! 1
am not a neoconservative who believes i n world
dominance and j u s t handing c o n t r o l to Goldman Sachs.

M i l t o n Friralnan

The Great Depression forces farmers to l e a r n

how t o beccms s k i l l e d Labor. By 1980, we f e l l from
40% agrarian to j u s t 3% as measured by the l a b o r
f o r c e . I t i s t r u e t h a t those who y e l l e d the loudest
d i d more than make noise- They furthered Marxism i n
ways no one understood. The whole nonsense o f c r e a t i n g the d o l l a r as the world reserve currency based
on the f a c t t h a t we had 76% of the world gold reserves
i n 1944, was matched by our s t u p i d i t y to f i x g o l d a t
9135 per ounce while f a i l i n g to l i m i t the quantity o f
d o l l a r s , A 5 year o l d c o u l d p r e d i c t such a system 1A
going t o go bust.. The bccm and bust c y c l e creates the
waves of economic innovation, progress, an eliminates
a l l excess while rewarding innovation i t s e l f .
I would give l e c t u r e s around the world
to the novers and shakers. Central Banks had
purchased blocks o f seats. Major corporations
came from around the world. Our Conference
h e l d i n Princeton i n 19B5 f o r 3 days, was a
mini-United Nations, The audience was perhaps
the f i r s t gathering of investors/businessmen
from around the world i n one place.

I d i d not begin seeking to be any s o r t

o f an academic. I was a a n a l y s t , trader, and
a g l o b a l fixer-upper. I was not t r a i n e d by
any p a r t i c u l a r school of philosphy, but by
our c l i e n t s . Having o f f i c e s around the world
and coming i n t o the b i r t h o f the f l o a t i n g
exchange r a t e system i n 1971, I stepped i n t o
an evolving f i e l d o f g l o b a l f o r e i g n exchange.
Running around the world, I seemed to be
c a l l e d i n t o j u s t about every major finanrriai
c r i s i s imaginable. I was c a l l e d i n t o the
t u r m o i l i n o i l i n the middle east and was
involved i n j u s t about everything from the
Greek shippers to the tycons of Europe and
A u s t r a l i a , and was even c a l l e d upon by China
i n the midst of the Asian Currency C r i s i s .
What I saw was from the f r o n t - l i n e s , not from
t e x t books, I saw Smith's I n v i s i b l e Hand at
work g l o b a l l y , 1 was forced to run studies
i n a l l currencies because every c l i e n t would
measure p r o f i t s and losses only i n t h e i r
home currency. Currency became a language
of g l o b a l economics.

A t one o f my l e c t u r e s , a small win o f

s t a t u r e attended who came up a f t e r I was
f i n i s h e d to introduce himself. I t was M i l t o n
ETiedman. Perhaps u n t i l t h a t moment, I had
not r e a l l y thought too much about c o n t r i b u t i n g
to economic theory, I was a man o f the r e a l
world, M i l t o n had advocated a f l o a t i n g exchange r a t e system i n 1953. What he saw I n me,
was h i s theories coming a l i v e . I had witnessed the I n v i s i b l e Hand on a g l o b a l scale t h a t
unless you had c l i e n t s around the globe, you
would never see. Milton's theories of Free
Markets being so complex t h a t i n t e r v e n t i o n
i s dangerous, I l i v e d such manents g l o b a l l y .
I::

i:
I:

HEISENBERG

voill A l w a y s UI/KI /

'Dncertanty P r i n c i p l e

11

Thomas J e f f e r s o n wrote h i s b e l i e f s
t h a t the United States would not l a s t . He
b e l i e v e d t h a t Revolutions were a n a t u r a l
course o f events and t h a t the Tree o f L i b e r t y had t o be refreshed with the blood of
both t y r a n t s and p a t r i o t s , J e f f e r s o n saw
c y c l e s i n h i s t o r y and d i d not expect t h a t
the United States would l a s t much beyond
the year 1900.
The loud cry o f the new Progressive
Democrats who shed the l a b e l s o f " l i b e r a l "
o r "Marxist" r e p l a c i n g i t with t h i s new and
b e t t e r v e r s i o n o f the same o l d b u l l s h i t ,
that the theory o f "Free Markets" i s dead
as demonstrated by the current economic
d e c l i n e , are indeed d r i n k i n g t h e i r own bath
water- They are c l e a r l y Ignorant o r perhaps
v o l u n t a r i l y b l i n d t o h i s t o r y , but they can
no more defeat the "Free Markets" t h a t i s
best portrayed as Smith's " I n v i s i b l e Hand"
today, than they were i n China, Russia, o r
at any point i n h i s t o r y .

Werner Heisenberg
(1901 - 1976)
Mo matter what we a r e l o o k i n g a t be i t
the Universe, our Earth, our r e a l world f a c t s
and events, or the microscopic world, there
i s a Grand U n i f i e d Theory that a l l systems
larges and small f u n c t i o n based upon the s e t
s t r u c t u r a l design. J u s t as we have a lm il l
that pumps blood c a r r y i n g oxygen t o v i t a l
organs, so does a dog, r a t , and a goat* The
s t r u c t u r a l design i s the same and the f a c t
t h a t l i f e e x i s t s based upon c e r t a i n design
s t r u c t u r e s i s evidence t h a t there i s some
master plan j u s t as DNA i s a code shared by
us as w e l l as dinosaurs.

They f a i l t o even comprehend how t h e

system works and the Republicans have j u s t
l e t the Investment Banks r u n the Treasury,
Courts, IMF, and World Bank, That i s not a
"Free Market" when they gather together t o
manipulate markets t o g a i n an u n f a i r advantr.
age. That i s n o t what the "Free Markets"
represent any more than the T a l i b a n by f o r ce f u l f i l l the w i l l o f G6d,

We understand that the Earth revolves

around the sun c r e a t i n g the f o u r seasons as
we have n i g h t and day, and the g r a v i t y even
p u l l s upon the ocean t o the create high and
low t i d e . We look out a t the Universe and
see t h a t everything f o l l o w s the same model
and we are spinning w i t h i n the Universe t h a t
takes about 26,000 years t o complete j u s t
one r e v o l u t i o n .

"Free Markets" means there e x i s t s the

most complex system of b i l l i o n s o f p l a i n
v a r i a b l e s t h a t a r e interconnected i n such
a way, t h a t we cannot manipulate the whole
for we do not even comprehend component
p a r t s . As a s o c i e t y we a r e standing on t h s
threshold of a completely new horizon, y e t
we are so blinded by our b i a s , hate and
prejudice we cannot see what e x i s t s . One
day l i k e ffeo i n the K a t r i x , our eyes w i l l
open and we w i l l be a b l e t o see the code
that l i e s beneath.

When we look a t the microscopic world,

we see w i t h i n an atom, the same s t r u c t u r e
w i t h objects r o t a t i n g around the center.
11

What wa are l o o k i n g a t i s a s t r u c t u r a l design upon which a U systems are based. There

may be v a r i a t i o n s , b a t a t the core, each i s
the same fundamental design.

s c i e n t i s t even under p e r f e c t i d e a l conditions,

from o b t a i n i n g accurate knowledge of the key
system under i n v e s t i g a t i o n , consequently, i t
becomes obvious that the system t h a t he is
attempting to i n v e s t i g a t e cannot completely
be predicted, Heisenberg thus e s t a b l i s h e d
t h a t pursuant t o the '^incertainty p r i n c i p l e "
no improvements w i l l ever overcome t h i s core
problem.

Smith I n v i s i b l e Band was a glimpse of

a complex system t h a t has been termed the
"Free Markets" i n t h a t there i s a n a t u r a l
inherent system t h a t flushes excess and
creates new o p p o r t u n i t i e s t h a t d r i v e s the
engine o f innovation.

This "uncertainty p r i n c i p l e " makes i t

c l e a r t h a t Within the very nature o f a l l
things, we are l i m i t e d to a s t a t i s t i c a l type
of p r e d i c t i o n . This means we may be able to
p r e d i c t t h a t say out o f 10 t r i l l i o n atoms
o f radium, there Will be 1 b i l l i o n t h a t w i l l
emit gauna rays within 24 hours. Bbwever, we
are unable to p r e d i c t whether any i n d i v i d u a l
radium atom w i i i emit a gamma r a y i -

In 1925, Werner Heisenberg proposed a

complete new foundation i n physics t h a t was
so r a d i c a l l y d i f f e r e n t i n i t s core concepts
as d i s t i n g u i s h e d from the c l a s s i c a l Newton
f o o s i l a t l o n . His v i s i o n has been accepted
as being a p p l i c a b l e t o a l l p h y s c i a l systems
no matter what s i z e they might be. For t h i s
very reason, we must r e a l i z e that we are
a l s o only a p h y s i c a l system and we a l s o may
not escape frcm these b a s i c concepts.

Classical

This i s a profound r e a l i z a t i o n t h a t i s
applied w i t h i n the complex g l o b a l economy.
We can p r e d i c t a economic d e c l i n e w i l l take
place even at a p a r t i c u l a r time, but since
there are b i l l i o n s of i n d i v i d u a l s (atoms)
the best we can do .is p r e d i c t the o v e r a l l
trend while the i n d i v i d u a l r e t a i n s the free
w i l l t o r e a c t o r not (emit a gamma r a y ) .

Mechanics

Quantum Mechanics
eisenberg's i d e a can be demonstrated
mathematically where only macroscopic systems
are involved, the p r e d i c t i o n s of Quantum
mechanics d i f f e r from those of classical
mechanics by amounts which are far too small
t o even measure. The c l a s s i c a l mechanics
i n v o l v e systems o f r e a l world siae t h a t are
mathematically s i m p l i s t i c i n comparison. Yet
where there are systems o f atomic dimensions
involved, the p r e d i c t i o n s o f quantum mechanics d i f f e r s u b s t a n t i a l l y from those i n the
classical mechanics.

Einstein himself when he r e a l i z e d the

s i g n i f i c a n c e of this l i m i t a t i o n , commented
"I cannot b e l i e v e t h a t God plays dice w i t h
the universe." That i s an example of the
sheer complexity t h a t we face a l s o i n the
f i e l d o f economics.
I f we consider t h a t everything that in
f a c t moves, every market, every sector both
w i t h i n commerce and industry running p a r a l l e l
to the productive forces, combine w i t h i n each
region, state, nation.and geographical area,
which i s then combined with the forces of
nature both e a r t h l y (volcanic/earth quakas)
as v e i l as weather, we can end up w i t h such
a v a s t overwhelming a r r a y of complexity that
one begins to see Helsenbarg's "uncertainty
principle,"

You may be asking what the h e l l does

this have t o do w i t h "Free Markets" and the
I n v i s i b l e Hand? :vell the cor.segj' r.ce of
Heisenber's theory i s known as the famous
"uncertainty p r i n c i p l e " t h a t he formulated
i n 1927, This i s perhaps one of the most
profound and far-reaching concepts w i t h i n
science, i t i s amazing t h a t i t has been j u s t
ignored by economists and p o l i t i c i a n s a l i k e .

When chaos theory began to emerge, i t

was noticed t h a t the s l i g h t e s t variance i n
a event could r i p p l e through and create a
major d i f f e r e n t trend at the end r e s u l t . This
was f i r s t expressed t h a t i f a b u t t e r f l y f lacs
i t s wings a t the r i g h t moment, i t can have
a s u b t l e cascade e f f e c t t h a t a l t e r s the
weather patterns. While perhaps a long-shot,
what vie are dealing with economically i s the
same observation t h a t was made by Heisenberg.

The "uncertainty p r i n c i p l e " confines

us to a large extent by s p e c i f y i n g d e f i n i t i v e
t h e o r e t i c a l l i m i t a t i o n s to our a b i l i t y t o
make even s c i e n t i f i c measurements. I f the
fundamental laws o f physics prevents any
12

1,
1

f'

1
The assumption t h a t everyone has made
ever since Marx, w i t h the sole exception o f
Friedman, has been t h a t v-e even have the raw
power t o manipulate the economy. What i f that
very idea i s dead wrong? What i f the complex
nature i s indeed t o o vast? We may end up j u s t
importing one spieces t o solve one problem
as they d i d i n A u s t r a l i a , that ends up k i l l ing o f f native species d i s r u p t i n g the e n t i r e
ecology.

A l l we can do i s m i t i g a t e the d e c l i n e ,
we cannot cure i t . We have t o stop t h i s p l a i n
i n s a n i t y and t r y t o make t h a t next step i n
the e v o l u t i o n of economics, STop the same o l d
b u l l s h i t about c r e a t i n g Utopia. I t does not
e x i s t and More used i t as a pun meaning "no
place,
We a r e i n the middle o f no place, with
nowhere t o go* We a r e s t i l l caught i n t h i s
b a t t l e o f words and s e l f - i n t e r e s t that can
only lead t o war, bankruptcy, and sheer d i s aster.

Man has learned he cannot transport one

animal t o a region t o solve an i s o l a t e d problem. The eco-system i s f a r t o o complex and
we w i l l destroy our environment by such a
c a r e l e s s behaviour. Why cto we have such a
high degree o f arrogance t h a t we can dc as
we l i k e t o the economy?
The ansvrer t o t h i s question i s that the
observer a l t e r s the system by h i s very presence. S t r a n g l e l y enough, the new ProgressiveCemocratlc-Marxists have t h e i r own s e l f - i n t e r e s t and no n a t t e r what we say, they w i l l not
l i s t e n . The I n v i s i b l e Hand i s hard a t work,
for i t does not preclude s u i c i d e . What we a r e
about t o witness i s the d e s t r u c t i o n o f our
economy under the pretense o f t r y i n g t o f i x
it.
Don't get me wrong. The Republicans are
no b e t t e r . Their idea of "Free Markets", i s t o
hand o u t contract t o t h e i r f r i e n d s and l e t
Gold Sachs run the finances. The $700 b i l l i o n
b a i l o u t orchestrated by Paulson t r y i n g t o
s l i p i n a g e t - o u t - o f - j a i l - f r e e card f o r h i s
Investment Banker f r i e n d s , was a n a t i o n a l .
disgrace of u t t e r c o r r u p t i o n . And as f o r the
neoccnservatives, they want t o dominate the
world j u s t l i k e P u t i n . That I s t h e i r s e l f i n t e r e s t - raw power.

S o c i a l i s m ceases t o work once you run

out o f other people's money. To whom w i l l we
s e l l bonds t o t o keep fund t r i l l i o n d o l l a r
d e f i c i t s ? The game w i l l come t o an end j u s t
as B r e t t on Woods came t o an end because the
p o l i t i c i a n s are .plain s t u p i d . I f you f i x the
gold a t $35 per ounce but allow the supply
of d o l l a r s t o expand without l i m i t , don't
you t h i n k someday you w i l l not have enough
gold a t $35 t o back the u n l i m i t e d supply
t h a t you create? Come on. Can we r e a l l y be
t h a t s t u p i d again?
Long-term trends a r e easy t o see. A t the
sub-atonic l e v e l , we f i n d t h a t the degrees
o f movement a r e greater than the mass o f the
objects making i t impossible t o p r e d i c t where
they w i l l appear. Moving up i n s c a l e , we f i n d
that the same degrees i n movement become j u s t
i n s i g n i f i c a n t when the o b j e c t i s thousands
o f times greater i n s i z e .

We cannot p r e d i c t w i t h c e r t a i n t y the
c l o s e of the Dow every day. That does not mear
we cannot p r e d i c t the broader trends and when
they w i l l change, we a r e on the verge of a
major change i n trend economically. Watch
13 gold, f o r i t w i l l explode w i t h uncertainty.

The New
Practical "Laws"
of Global Economics
Why Taxes are the only tool remaining!
by Martin A. Armstrong
former Chairman o f Princeton Economics T n t ' l , Ltd,.
Copyright Nov,

26th, 2008

One o f the h i g h l i g h t s o f my e a r l y career was M i l t o n Friedman attending one

of my l e c t u r e s . A t f i r s t I was surprised that such a great mind would take the
time to ccroe l i s t e n t o what T had t o say, I was not an academic. I was a g l o b a l
a n a l y s t and fixer-upper. But then T remembered t h a t back i n 1953, H i l t o n had
argued f o r a f l o a t i n g exchange rate system r a t h e r than a f i x e d exchange r a t e
system designed a t Bretton Weeds during 1944. M i l t o n had seen the free market
forces adding the checks and balance to keep governments i n l i n e . As our convers a t i o n progressed, x r e a l i z e d I was doing what M i l t o n had proposed and I was i n
the f r o n t l i n e s . Indeed, i n 1997, I t e s t i f i e d before the House. Ways a Means
Committee on g l o b a l t a x a t i o n at the request o f then Chainnan B i l l Archer, when
you t e s t i f y before Congress, they group you i n t o panels w i t h l i k e persons. T was
placed on a panel w i t h other economists who were pure academics. S i l l apologised
f o r the grouping because there was j u s t no one q u i t e i n my f i e l d . I was not theory,
but p r a c t i c e .
I never met John Maynard Keynes. Nevertheless, as the hands-on-guy who j u s t
d i d not f i t i n t o t h a t i v o r y tower model, T had to deal with real-world e f f e c t s o f
the f l o a t i n g exchange r a t e systen that was born i n 1971 through a mere trade
dispute u n l i k e Bretton Weeds. I became a g l o b e - t r o t t e r rushing around frcm one
c r i s i s to another. X would meet with c e n t r a l bankers and even l e c t u r e d before them
i n meetings such as i n P a r i s o r i n Toronto, and was asked t o f l y to B e i j i n g i n
1997 to meet w i t h the Central Bank o f China during the Asian Currency C r i s i s . SO
what I had to o f f e r was a f r o n t row seat that few ever achieved. M i l t o n helped
me appreciate the unique p o s i t i o n I ended up i n - the Bird's .Eye view o f the world.
There was a f i e r c e b a t t l e between the theories o f Keynes and Friedman. I n
e f f e c t , Keynes had advocated that government could steer the economy through t h e
economic t u r m o i l by manipulating i n t e r e s t r a t e s and taxes whereas fxiedman argued
government could never steer the car and at best the key resided i n the quantity
o f money- This b a t t l e raged between the'19S0s through the 1970s. M i l t o n was j o i n e d
by K a r l Srunner and A l l a n Meltzer, who became known as the "monetarists" t h a t were
a t f i r s t t r e a t e d w i t h d i s d a i n . But the "ore o f the monetarists theory was deeply
rooted i n the t h e o r i e s o f John Locke ft632-T704), David Hume (1711-17761, John
Stuart M i l l (1006-1373), and David Rlcardb (1772-1323). Eventually, during the
Carter Administration o f the l a t e 1970S; Congress ordered the Federal Reserve t o
take the monetarist arguments s e r i o u s l y .

I d i d not set out w i t h a burning d e s i r e t o be an academic. Nor d i d I

seek a journey t o change the laws of economics. T was an analyst seeking only
p r a c t i c a l answers t o be able t o cope with the world and understand investment.
Before fax machines, the a n a l y s i s I produced was d e l i v e r e d by Western union
v i a t e l e x and i n the e a r l y 1980s, sending j u s t one t e l e x on one market cost
"J50""to" 'ths~TBi^^e~&sti-^VGCY-6aYy'-each-marketwas-oovered-in''the--f-inaneialr-group i n c l u d i n g precious metals, stock indexes, and a l l major currencies. The
cost t o take a l l the s u b s c r i p t i o n s could exceed $200,000 j u s t i n t e l e x fees t h a t
adjusted f o r i n f l a t i o n i n 2006 d o l l a r s would be ST ,6 - $2 m i l l i o n . So the audience
j u s t happened t o be the major i n s t i t u t i o n s and government around the world. By
sheer chance, what emerged was a i n c r e d i b l e opportunity t o see l i k e Adam Smith
the r e a l movers and shakers. F i n a l l y , i n 1985, I decided t o open our f i r s t o f f i c e
outside o f the United States i n London. The reasoning was that i f I could send j u s t
one t e l e x t o London and then a l l o w them t o r e d i s t r i b u t e from that p o i n t , the costs
would d e c l i n e and we could expand our c l i e n t base i n t o the l e s s o r middle c l a s s
of corporations. T met w i t h the head o f a major Swiss bank i n Geneva. We had become
f r i e n d s and I t r u s t e d h i s advice. I asked him what name t o use. I was assuming
sane t h i n g European. He asked me t o name one European a n a l y s t . I was embarrassed. I
could not. He s a i d that was h i s p o i n t . He s a i d everyone turned t o me because I was
American, and Americans could care l e s s i f t h e i r currency rose o r f e l l . But Europeans
were trapped i n t h e i r a n a l y s i s by t h e i r p a t r i o t i s m . The B r i t i s h were always b u l l i s h
the pound; the German the mark, and the French the franc.
The fundamental problems w i t h economic theories i s j u s t that. They are t h e o r i e s .
I d i d not seek t o e s t a b l i s h any new theory ho- l e s s create "laws" t h a t are f i x e d
and u n y i e l d i n g . But we sometimes t r a v e l down a road and get hungry, we search f o r
a place to eat and on that r a r e occasion, we stumble upon a new discovery - a great
restaurant t h a t brings, a smile t o our face upon remembering.

end
The
the
and

The economy i s l i k e a c h i l d , i t grows and matures, we may expect one c h i l d t o

up i n one profession, only t o discover they explore an e n t i r e l y d i f f e r e n t path.
problem with economists i s they have perhaps not seen what I have seen, such as
vast pool of funds t h a t runs around the world a l t e r i n g the course of nations
destroying the best plans o f men and p o l i t i c i a n s .

Why do we need the "New P r a c t i c a l 'Taws' o f Global Economics" today mere

ever? The reason i s we are f l y i n g i n a j e t but are s t i l l a c t i n g as i f we have
prop-plane. Many o f the p i l o t s could not make the t r a n s i t i o n t o a j e t because
were unable t o respond q u i c k l y t o consider the dramatic increase i n speed- We
the same problem i n managing the economy.

than
a
they
have

The theories t h a t p r e v a i l today bounce back and f o r t h between Keynes and

Friedman w i t h a l i t t l e Marx thrown i n f o r f l a v o r . Do we increase money supply,
lower i n t e r e s t r a t e s and taxes, or j u s t regulate everything t h a t moves and pretend
we are not t a k i n g the toys away from the k i d s as Marx advocated? Do we ignore the
I n v i s i b l e Hand of Smith t o the p o i n t t h a t we are b l i n d to the s e l f - i n t e r e s t o f
Government t h a t cannot sleep a t night unless i t f e e l s i n complete c o n t r o l o f our
lives?
When gold was money, the c a p i t a l flowed between nations o n l y because there was, as
David Eicarrib explained , a comparative advantage. This was the key t o i n t e r n a t i o n a l
trade - t h e i r d e s i r e to'purchase something one could not o b t a i n l o c a l l y or was at
a s i g n i f i c a n t l e s s o r p r i c e a l l o w i n g f o r "arbitrage" that gave b i r t h t o insurance
t o cover the r i s k of long voyages. This " a r b i t r a g e " s t i l l e x i s t s today j u s t i n
the form o f e l e c t r o n i c t r a d i n g on a g l o b a l s c a l e . We need a new understanding of
c a p i t a l and how i t moves because we're not i n Oz anymore Dorothy!
2

Most theories i n economics are not p r a c t i c a l because they are based upon
assumptions that are not r e a l . The same problem has wiped out the Investment
Bankers because (1) they create models by young students who do not understand
market dynamics, and (2) they assume there i s always a market and f a i l t o map
those pesty periods when the mcdel would f a i l such as the Great Depression.
This is'"aJcOTto"making ^'the assumption'"that we w i l l " liv^TfoTgver.^Tt i s Lhe o l d
d i f f e r e n c e between the o p t i m i s t and the pessimist who both are blown o f f the
top o f the Empire State B u i l d i n g . The Pessimist says immediately - "Oh my God
1 am going t o d i e i " The o p t i m i s t can be heard while passing the 4th f l c o r "Well so f a r so gocdl"
LAW #1 - C a p i t a l Moves To Avoid Danger G l o b a l l y
This law would seem t o be s e l f - e v i d e n t . We have a l l heard o f the " f l i g h t t o
q u a l i t y " where i n a domestic economic d e c l i n e , c a p i t a l f l e e s stocks and p r i v a t e
assets moving t o the best q u a l i t y that may he Government short-term paperHowever, c a p i t a l reacts the same way g l o b a l l y and those reasons are not
always apparent domestically.
(1) c a p i t a l w i l l f l e e a war o r threat o f war. During World War I and n ,
the c a p i t a l flowed t o the United States. By the end o f World War I I ,
the u n i t e d States had 76% o f the world gold reserves. During the Sues
Canal c r i s i s , the d o l l a r rose on c a p i t a l f l e e i n g Europe as they once
again perceived a r i s k , although i t was very b r i e f . Yet during t h e
Cuba M i s s i l e C r i s i s , c a p i t a l f l e d the opposite t o Europe. The same
was t r u e f o r c a p i t a l began t o f l e e i n advance o f various middle east
wars.
(2) c a p i t a l takes f l i g h t when i t fears unstable economic conditions that
can be caused by i n f l a t i o n , t a x a t i o n , n a t i o n a l i z a t i o n , g e o p o l i t i c a l ,
or negative perceptions i n p o l i t i c s and the economy a l t e r i n g confidence.
EXAMPLE:
The Great Depression was made f a r worse by p o l i t i c i a n s who d i d not understand
g l o b a l c a p i t a l flows t o q u a l i t y . I n Herbert Hoover's Memoirs, he has a l l o f
the documentation that revealed World War I I began w i t h the f i n a n c i a l markets
i n the 1930s t h a t l e d t o nations a t t a c k i n g t h e i r bond markets that l e d t o t h e
wholesale c o l l a p s e o f European debt. Even B r i t a i n went i n t o a moratorium on i t s
debt suspending a l l payments. These d e f a u l t s sent c a p i t a l f l e e i n g t o the United
States causing the d o l l a r t o r i s e , and i n t e r e s t r a t e s t o f a l l i r r e s p e c t i v e o f
Fed p o l i c y . P o l i t i c a n s o n l y viewed the r i s e i n the d o l l a r and responded w i t h
protectionism - Smoot-Hawley i n June 1930 destroying i n t e r n a t i o n a l t r a c e and
sending the economy back i n t o a feudal s t a t e o f economic dark ages. Had t h e r e
been the understanding o f the " f l i g h t t o q u a l i t y " t h a t can emerge f o r a host
o f i n t e r n a t i o n a l reasons t h a t swamp the domestic conditions, perhaps there
may have been scarte hope.
The 1967 Crash was caused by the formation o f the G-5 i n 19B5 and the p e r s i s t e n t
t a l k about lowering the value o f the d o l l a r by 40% t o reduce the trade d e f i c i t .
The Japanese, who had bought up t o 33% o r so o f the n a t i o n a l debt and loads o f
r e a l e s t a t e l i k e R o c k e f e l l e r Plaza i n New York, were being t o l d i n d i r e c t l y t h a t
whatever investments they made were going t o be devalued by 40%. The 1987 crash
tcok place w i t h everyone befuddled because there was no change i n the domestic
fundamental conditions o f the economy or corporate- earnings. The f l i g h t o f
c a p i t a l by the Japanese caused by the G-5, l e d t o the c a p i t a l concentration
i n Japan w i t h f o r e i g n i n v e s t o r s l o o k i n g a t a r i s i n g yen & assets c r e a t i n g the
1969 high,
:

Another example i s a mind t w i s t e r . Between 19S0 and 1985 I was g i v i n g

l e c t u r e s throughout Europe. The number one q u e s t i o n ! was asked; What
was my opinion of the United states adopting a t w o - t i e r currency system?
X understood the question only because I studied money g l o b a l l y and had
a l s o c l i e n t s from South A f r i c a when there was the Rand and the " F i n a n c i a l
Rand."-One ou^rency-rs-used dcmestcally>but-it c a n n Q t - h ^ u a e d - f o r - a n y
purchase o f gccds & s e r v i c e s outside the country. The rand would need t o be
converted t o the " F i n a n c i a l Rand" t h a t was allowed t o be used e x t e r n a l l y
c r e a t i n g the two-tier system- The Euro-Dollar market had h i t $1 t r i l l i o n
n e a r l y i n 1980 as d i d the US n a t i o n a l debt. Europeans were convinced the
way t o escape the debt was f o r the US to create a t w o - t i e r currency. This
led them t o move t h e i r Euro-Dollar deposits i n t o onshore domestic d o l l a r
deposits. They had assumed that the Euro-dollars would be new "blue" d o l l a r s
worth l e s s than the domestic "green" d o l l a r s . The more convinced the r i s k
was perceived, the more c a p i t a l flowed. The Euro-Dollar deposits d e c l i n e d
sharply and t h i s drove the d o l l a r t o record highs i n 19B5. The more b e a r i s h
Europeans became, the more b u l l i s h the d o l l a r trend. T h i s was amazing to see. ..
Government misunderstood c r e a t i n g the G-5 i n =1965 announcing they wanted t o see
the d o l l a r d e c l i n e by 40%. The Japanese began t o s e l l US investments t a k i n g
c a p i t a l back causing the yen t o r i s e a t t r a c t i n g others c r e a t i n g a bubble top.
Law #2 - C a p i t a l Moves G l o b a l l y For Comparative Advantages i n Currency
The t r a d i t i o n a l Ricardo mcdel of ccmparative advantage was b u i l t upon a world
when gold was money. We must r e a l i z e t h a t p r i o r t o 1971 with only b r i e f exceptions,
the c a p i t a l flowed only because of a comparative advantage r e f l e c t e d i n investment
r a t e s o f r e t u r n , t o gain gccds that were not a v a i l a b l e i n the domestic economy, or
for a r b i t r a g e i n s o f a r a s the same produce a v a i l a b l e i n one nation was cheaper when
compared t o domestic p r i c e s , then trade i n t e r n a t i o n a l l y would take place e x p l o i t i n g
those d i f f e r e n t i a l s t h a t was an e a r l y form of g l o b a l a r b i t r a g e .
However, we are no longer i n a world o f a g o l d standard where money i s the
same r e l a t i v e i n t e r n a t i o n a l l y . Gold might buy more gccds i n one nation than another,
but i t i s the d i f f e r e n t i a l i n the p r i c e of goods r e l a t i v e t o the same amount o f
gold that f l u c t u a t e s due t o other e x t e r n a l f a c t o r s - labor & t r a n s p o r t a t i o n c o s t s .
Today, a f l o a t i n g exchange r a t e system has a l t e r e d that time honored t r a d i t i o n and
t h i s a f f e c t s every economic theory rendering them i r r e l e v a n t ^
(1) c a p i t a l may now move according t o the o l d p r i n c i p l e s o f trade and
seek an a r b i t r a g e t o purchase the same goods cheaper i n another
land that has a comparative advantage such as lower labor costs,
l i t t l e or no tax r a t e s , or on seme occasions d e l i b e r a t e p r i c i n g ,
below cost t o gain market share ( r a r e event).
(2) c a p i t a l may a l s o move s o l e l y because of currency f l u c t u a t i o n s , o r
d i f f e r e n t i a l s i n i n t e r e s t rates such as the c a p i t a l outflows frcm
Japan t o gain.the higher rates of i n t e r e s t i n d o l l a r s , where no
such ccmparative advantage e x i s t s s o l e l y due t o trade, but the
c a p i t a l flows due t o currency may i n f a c t a l t e r the trade balance.
Where under our f i r s t Law c a p i t a l flows t o avoid g l o b a l r i s k , here we f i n d i n
the calm o f the storm, c a p i t a l w i l l flow purely according t o the a r b i t r a g e i t sees
i n values. This i s what M i l t o n Friedman advocated back i n 1953. He saw t h a t t h i s
n a t u r a l flow would place a check and balance upon governments, i n r e a l i t y , t h i s i s
the manner i n which c a p i t a l a l s o votes r e l a t i v e t o the p o l i t i c s of a nation. We are
no longer i n Oz. C a p i t a l w i l l flow not because of s o l e l y the ccmparative advantage
i n trade, but i n the value of money i t s e l f . They can at tunes both be "arbitrage.
4

The
New
Practical "Laws"
of Global Economics
There are other "Laws" that now e x i s t a l s o w i t h i n our new Global Economy.
However, l e t us s t i c k to these f i r s t two Laws f o r they alone a l t e r every theory
i n economics to date. The " p r a c t i c a l " side o f these two r e a l i z a t i o n s i s that
the e n t i r e f i e l d o f economics changes much, l i k e what G a l i l e o d i d to dogma. I f
the planets revolve around the sun r a t h e r than the sun around the planet, then
where i s up and where i s down? Translate t h i s i n t o heaven and h e l l , and you can
see why he was imprisoned f o r l i f e .
Suddenly, how we manage our economy i s no longer autonomous. The theory o f
chaos you might r e c a l l was explained t h a t the f l a p o f the wings o f a b u t t e r f l y i n
A s i a could set i n motion changes to the winds i n the Americas. Although extreme,
the p r i n c i p l e remains the same - kind o f l i k e a s c i - f i movie - "We are not alone!"
Indeed, the a c t i o n s of one w i l l have an impact upon a l l others. We cannot escape the
consequences of our own a c t i o n s . I t i s j u s t impossible.
In my g l o b e - t r o t t i u g running between
nations and g e t t i n g to see f i r s t hand what
was taking place,, my eyes opened l i k e never
before. This i s what M i l t o n perhaps saw i n
me before I myself r e a l i z e d the f u l l scope
o f what I had f a l l e n i n t o . They d i d not
teach global c a p i t a l flows i n school. They
d i d not even teach hedging and f l o a t i n g
exchange r a t e s . This was a f i e l d t h a t justemerged more a k i n t o being an apprentice.
But what I observed g l o b a l l y was the grand
I n v i s i b l e Hand o f Adam Smith (1723-1790),
y e t on an i n t e r n a t i o n a l l e v e l - The image i n
my mind was each nation formed a gear i n
one giant machine we c a l l the economy o f
nations. Turn one, and there w i l l be an
e f f e c t i n a l l others - We are a l l connected.
How do we create a p r a c t i c a l theory? K a r l Marx (1816-1883) saw the collapse
i n c a p i t a l i s m as a c l a s s struggle between labor and employer assuming the l a t e r
would e x p l o i t labor t o the p o i n t they could no longer consume. He ignored Smith
and paid no mind to money supply and the bocm bust economic c y c l e . He destroyed
(1) personal l i b e r t y p l a c i n g i t i n the hands of.government f o r the greater-gocd,
and (2) ignored the s e l f - i n t e r e s t o f the s t a t e to also expand i t s personal powerI t was Ivan IV (1533-S4) "the T e r r i b l e " who s e i z e d land o f h i s enemies. and_gave'.it
to h i s supporters yet r e a l i s e d i f the workers l e f t , the l a n d became worthless.
He enacted a law t h a t the workers (serfs) could not leave l a y i n g the seeds f o r
the Russian r e v o l u t i o n i n 1917. C l e a r l y , other r u l e r s saw the problem, but d i d
nothing t o c o r r e c t i t . Alexander I (1777-T325) came to power i n 1801 and spoke about
reform, but then Napoleon invaded p u t t i n g an end to t h a t p o s s i b i l i t y . So Marx
was wrong. I t was not l i m i t e d to employers, but could a l s o be the s t a t e t h a t i n
f a c t e x p l o i t e d the people. Handing a l l the assets to the state and destroying the
l i b e r t y o f i n d i v i d u a l s , was not the answer. To f i x what i s wrong, requires a c l e a r
working knowledge of what we are t r y i n g to f i x . Bad t h e o r i e s and assumptions have
l e d to the deaths of m i l l i o n s . We need " p r a c t i c a l " econcmics - not t h e o r i e s .
5

i n Times k i k e
Present
Should W Fcdlow Keynes o r Friettnan?
Oj. po we Weed a Ne- Theory Altogether?
^ j e r s t a n d i n g Keynes and Friedman may mean the d i f f e r e n c e between s u r v i v a l
or economic d e s t r u c t i o n that leads always t o war. The Monetarists accused Keynes
o f i g n o f ^ ^ ironey. This i s t r u l y a c r i t i c a l point t h a t must be understood. By
advocating, two t o o l s i n t e r e s t r a t e s and taxes, Keynes i s approaching the economy
i n d i r e c t l y * I n other words, t o stop some behavior the government does n o t l i k e
i n you, i * d i r e c t l y a t t a c k i n g your wife i n hopes she w i l l cause a change i n
your bJ
" Japan was i n a very bad economic depression, i t lowered i n t e r e s t
r a t e s t o * tenth-of-one percent tQ.1%), i t was v i r t u a l l y zero. A l l t h i s d i d was
cause c a P ^ ^ l t o seek i n t e r e s t r a t e p r o f i t s elsewhere and d i d nothing t o r e l i e v e
the a c o r * * ^ downturn i n Japan. The f i n a l lew may come i n 2009 a f t e r the 1989
high. wsi tlri 9 f o r a p o s s i b l e low 20 years l a t e r , i s not acceptable f i s c a l p o l i c y . ,
Economlo d e c l i n e s can be very prolonged. From the 1S73 Panic i n the United States,
the e c o n ^ " ^ d e c l i n e l a s t e d o v e r a l l u n t i l 1396 - 23 years l a t e r . That i s a waste
of geneT& y / 3 r d o f everyone's l i f e t i m e .
1

iavio,:

11

The Monetarists approach i s t o increase the money supply, n o t use i n d i r e c t

means y i a t hope w i l l change events. I f we simply gave everyone $1,000, there i s
no g u a r s
t h a t they wmld spend i t . I f t h e i r confidence i s s t i l l d i s t r u s t i n g ,
they may/ j ^ t pocket the money w a i t i n g f o r a r a i n y day. This would not increase
the money* P P l y f o r that we measure t r u l y i n terms of v e l o c i t y . I f we c o l l e c t i v e l y
add up tb economy i n what we c a l l the Grose Domestic Product l"GDP"), and w*
d i v i d e fcfrst ky the money supply, we achieve what i s known as the turnover r a t e
(Velocity) ^ rocney supply d i v i d e d i n t o GDP creates a v e l o c i t y r a t e o f 6:1,
t h i s mea " ^ e "'float'- o r holding period before spending i s about 2 months. I f we
increase
^
^
t i n e period drops t o 1 month. We d e f i n e Ml money
supply
r i t e e

S u

r f

115

r a t e

1 2 : T

&

(1) the amount of currency held outside banks

(2) the checking accounts a t ccmmercial banks (demand deposits)
a

Thi-5
very narrow view o f money. I t does not include stocks, bonds, and
r e a l e s t a t e - three major areas where c a p i t a l Can r e s i d e and i s considered t o be
'"wealth" by every r a t i o n a l person. Where problems a l s o enter I s the assuDptlon o f a
perfect-world- i f the v e l o c i t y i s constant, then I f the c e n t r a l bank can t r u l y
manipula
money supply ( v e l o c i t y ) , they would have a d i r e c t t o o l that i s
f a r t e t t e r than i n t e r e s t rates ano" taxes. Hcwever, i f the v e l o c i t y can f l u c t u a t e
widely according t o the "confidence" of the people, then manipulating the money
supply wrjuld a l s o be reduced t o an I n d i r e c t t o o l . Here i s where the forces o f
Keynes S ^ Friedman c l a s h , Keynes argues t h a t the v e l o c i t y i s unstable, whereas
Friedman ^ u l d take the opposite p o s i t i o n .
te

t h e

pjhg debate about money may be the t h i r d o l d e s t p r o f e s s i o n . P r i o r t o about

600 EC money traded i n clumps of s i l v e r and gold and i n some areas o f I t a l y i t
took the form of c a t t l e and l a t e r bronze. Every time there was a t r a n s a c t i o n , the
metal hs4 ^ ^ tested and weighted- King Croesus o f Lydia (ca 560-546 EC) (TurkeyJ
cajflg ^ -with the idea that he would pre-test and pre-waigh g o l d c r e a t i n g the f i r s t
coinage* Other kings q u i c k l y caught on and i t became a sweeping new trend o f a
show of P
and wealth. Economically speaking, i t was a step toward making
commerce e f f i c i e n t and thus increased progress and the v e l o c i t y o f money. Trade
expended
the age o f empire b u i l d i n g followed s h o r t l y t h e r e a f t e r . I t was Money
i n the form o f a standard u n i t o f exchange t h a t furthered i n t e r n a t i o n a l trade. The
reference
Jesus overthrowing the tables at the Temple s t a t e s they were the tables
of the ''money changers" John 2:15, who were the ancient f o r e i g n exchange d e a l e r s ,
6
c f t j e r

t D

i
. The invention of money brought with i t t h e n a t u r a l consequence o f the i n e v i t able c o u n t e r f e i t i n g . However, c o u n t e r f e i t i n g has never r e s u l t e d i n widespread
i n f l a t i o n even when used f o r the m i l i t a r y purpose o f undermining the currency o f
one's opponent used by England against the American c o l o n i e s d u r i n g t h e Revolution
as w e l l as during WW XTThe s i n g l e g r e a t e s t threat t o the money supply has
aJ.way3_c.0me from t h e i s s u i n g government i t s e l f .

o o
UJ -IN
It

c-i

i^c^r^
I.

I .1

M'O

ift p-- :in rt o

ic P I * s r s

- r ^ o i
co-d- Q

The above chart i l l u s t r a t e s the metal content of the Reman Monetary System.
I t was the steady debasement of the s i l v e r content of the Roman Denarius t h a t
f i n a l l y l e d t o an a l l out c o l l a p s e during t h e T h i r d Century AD. For c e n t u r i e s ,
government s have sought t o expand t h e i r money supply by debasing the currency. I n
other itords, reducing the content of precious metals t o enable the same amount
o f gold and s i l v e r t o create more coinage. The economic a d v i s o r t o Queen E l i z a b e t h I
c o r r e c t l y observed the response t o such p r a c t i c e s among the population. Et was
one of the e a r l i e s t Economic T ^ W S e s t a b l i s h e d - Bad money d r i v e s good money o u t of
c i r c u l a t i o n - S i r Thomas Gresham (1519^1579
. The economic hardships that
E l i z a b e t h faced during her r e i g n between 1533 and 1603 i n c l u d i n g the defeat o f
the Spanish Armada put great economic pressure t h a t was seen i n t h e debasement
o f coinage, indeed, Gresham's Law proved t o be c o r r e c t during the 1960s whan
s i l v e r was taken out of mcdern coinage being replaced with n i c k e l and copper.
The s i l v e r coins q u i c k l y disappeared and were worth a premium t o the "bad" money
t h a t entered the world economies.
r

Th* notion about watching the rrtvTey has been around f o r a long time - f a r
longer than Keynesian theory. The famous economist of t h e Great Depression e r a
I r v i n g F i s h e r (1367-1947) derived a formula i n 1911 i n s p i r e d by John Stuart M i l l ' s
a n a l y s i s c r e a t i n g the "quantity theory" of money being MU = PQ. The "V" i s t h e
v e l o c i t y o f "w" money supply where the "PQ" represents GDP ("P" being the p r i c e
l e v e l , and "Q" being the quantity of gccds * s e r v i c e s produced) _ This equation
can be reduced bo e x p l a i n the Monetarist theory i n i t s most s i m p l i s t i c form, t h a t
a manipulation o f "W (mcnev supnly) w i l l create a d i r e c t e f f e c t i n "P" ( p r i c e s )
that we i n s t i n c t i v e l y view a3 " i n f l a t i o n " defined as (too much money chasing t o o few
goods). H i s t o r i c a l l y , i t was always the supply o f money and i t s q u a l i t y that had the
impact upon the economy of mankind.
7

point to keep i n mind. People generally assume "that a d e f i c i t i n spending w i l l

be d i r e c t l y i n f l a t i o n a r y . We must r e a l i s e that t h e gold standard i s dead, what we
even d e f i n e as "money" w i t h i n M1 e f f e c t s c u r e n t i r e concept of how t o manage the
-economy as" a whofeff-bonds are- Boi^part-ef t h e
n e i t h e r would d e r i v a t i v e s on such products. These ideas a r e obviously wrong i n
the face o f our current c r i s i s . Under M1, d e r i v a t i v e s do not e x i s t .
We do not l i v e i n a purely Keynesian world- The Federal Reserve dees i n f a c t
seek to manipulate the money supply as p a r t o f i t s t o o l s . F i r s t , there i s the
discount r a t e where i t lends money t o the banks that i n t u r n le*** money i n t o the
economy i n normal conditions when not covering losses i n a c r i s i s . I f the Fed
r a i s e s or lowers t h e r a t e of i n t e r e s t i t w i l l i n theory a f f e c t t h e lending of
the banks by reducing t h e i r borrowings by r a i s i n g rates higher. But i f the debt
c r i s i s i s causing a c o l l a p s e , then .people w i l l pay higher r a t e s t o stay a f l o a t .
Therefore, we must be cautious about making too many assumptions based upon t h *
p e r f e c t world. This can d i r e c t l y increase o r decrease the money supply through
the lending t o banks, but i t i s not a. l i m i t a t i o n upon the borrowing that I s being
employed as t h e t o o l , i t is the .indirect e f f o r t t o a f f e c t demand by i n t e r e s t r a t e s .
F

Second, the money supply i s more d i r e c t l y manipulated by t h e buying and s e l l i n g

o f Government bends. The ted can increase the money supply as defined by Ml through
buying Government bonds from the piilic i n j e c t i n g therefore cash. I t can reduce
money supply by s e l l i n g Government bonds i n t o the market t a k i n g i n excess cash.
These assumptions are what were taught i n school, but guess what? They a r e
wrong! T h i s e n t i r e mcdel i s based upon the assumption of a gold standard and a
r e l a t i v e l y closed economy. L e t us say t h a t the Fed d e s i r e s t o stimulate the economy
so i t increases the money supply i n theory by buying Government bands. This would
work assuming the s e l l e r to the Fed i s a l o c a l r e s i d e n t . I f China decided t o s e l l
US bonds i t holds because i t suddenly needs cash, the Fed purchase w i l l not then
stimulate t h e domestic econcmy a t a l l f o r the money i n j e c t e d i n t o the system i s
headed t o China. Hence, an increase i n money supply i s n o t always i n f l a t i o n a r y I
Our d e f i n i t i o n o f money i s f a r too narrow i n a F l o a t i n g Exchange Sate System.
I f we look a t a piece of r e a l e s t a t e t h a t changes hands f o r $1 b i l l i o n and one
American, s e l l s i t t o another, the net e f f e c t i n the money supply i s zero. Bowever,
i f Japan enters and buys t h a t same piece of r e a l e s t a t e , they b r i n g yen, convert
i t t o d o l l a r s , and now one American has $1 b i l l i o n i n h i s pocket that d i d not e x i s t
p r e v i o u s l y ! M i l t o n may not have witnessed what I have seen f i r s t hand, but he
saw that the p o s s i b i l i t y e x i s t e d where changes i n t h e supply o f money d i d not
e f f e c t merely p r i c e s i n the i n f l a t i o n a r y mcdel, but economic a c t i v i t y . That has
come back t o haunt us i n a F l e e t i n g Exchange Rate System t h a t goes f a r beyond
what M i l t o n envisioned back i n 1953.
The Monetarists assumed that v e l o c i t y was s t a b l e and thus an increase i n
money supply would r e s u l t i n greater spending o f t h e e x t r a cash on goods and s e r v i c e s
causing GDP t o r i s e . The Fed could slow t h e growth rate by s e l l i n g bonds taking
cash out o f t h e system. But these assumptions are not r e a l , f o r the v e l o c i t y can
and w i l l change depending upon "confidence" and i n a F l o a t i n g Exchange Rate System
the Fed cannot d i r e c t l y be sure i t i s p u t t i n g money i n t o o r t a k i n g out of the system
when there a r e f o r e i g n holders of debt. The mcdel begins t o decompose under our
new dynamic g l o b a l economic system.

Keynes disagreed w i t h the Monetarist's tiewthat money supply was the key.
Keynes a c t u a l l y began w i t h a focus upon money supply and evolved i n t o the p o l i c y
theory of i n t e r e s t rates and tax manipulation, whereby M i l t o n began w i t h the
Keynesian model a ^ reverted back t o study money supply concluding t h a t Keynes would
create massive new spending that would only lead t o i n f l a t i o n . Was he c o r r e c t ?
13

Keynes bought i n t o _ t h e money supply model a f t e r viewing the hyper i n f l a t i o n

oT the~German itelmaf EepiIbTIc oetween f9^T"ancT f~924. Keynes viewed i n M S "Tract on ""
Pfcnetary Reform that i t was the increase i n the quantity o f money t h a t caused the
population t o spend money f a s t e r that i n t u r n led t o e s c a l a t i n g p r i c e ananvances.
However, Keynes f l i p p e d p o s i t i o n s a f t e r the Great Depression i n h i s General Theory
he believed i t was a c o l l a p s e i n demand r a t h e r than money supply, t h a t l e d him
to h i s t o o l s o f i n t e r e s t r a t e s and taJDes. Keynes saw no reason why the v e l o c i t y
o f money would remain s t a b l e . Keynes was not sure t h a t a mere increase i n money
supply would t r a n s l a t e i n t o more spending o f excess, cash- He recognized that an
increase i n money supply may not produce an increase i n v e l o c i t y f o r people could
s t u f f i t i n t h e i r mattresses, and thus the d e c l i n e i n v e l o c i t y would negate the
increase i n money supply. Keynes also argued that others may hoard cash t o a l s o
speculate i n stocks o r bonds. Keynes thus saw that i n t e r e s t r a t e s could e f f e c t the
speculative demand and i n h i s mind had a more d i r e c t e f f e c t than money supply
concluding that a increase i n money supply might be o f f s e t by a increase i n hoarding.
Keynes thus took the anti-Monetarist p o s i t i o n i n a l e t t e r a d v i s i n g President
F r a n k l i n D. Roosevelt:
"Some people seem t o i n f e r . _. that output and ^ccme can be
r a i s e d by i n c r e a s i n g the quantity o f money. But t h i s i s l i k e
t r y i n g t o get f a t by buying a l a r g e r b e l t . I n the u n i t e d States
today your b e l t i s plenty b i g enough f o r your t e l l y . "
The C o l l e c t e d Writings o f John Maynard Keynes (Vol XXI ^ p294)
London: Macmillan/st. Martin's Press f o r the Royal Economic S o c i e t y 1973
Rcosevelt took the money approach by (1) c o n f i s c a t i n g a l l gold, and {2) he
then devalued the d o l l a r o f f i c a l l y increasing the supply of money r e l a t i v e t o
gold by r e v i s i n g the system from 520 f o r an ounce of gold t o 535. This d i d not
have the widespread e f f e c t that he perhaps s e c r e t l y believed. Rcosevelt a l s o
made I t i l l e g a l f o r Americans to own gold. That was not overruled u n t i l 1975. I t
was presumed that i f the p u b l i c could s t i l l heard gold, they would do so, and
defeat the best e f f o r t s t o I n f l a t e . There was something l u r k i n g i n the bushes
that was a l s o the s i l v e r l i n i n g i n the dark clouds of the Great Depression. I t
was nature and her 7 year drought o f B i b l i c a l proportions as i n the s t o r y o f
Jceseph. The Great Depression forced a new age of progress by n e c e s s i t y - the
new age of s k i l l e d labor f u l f i l l i n g the culmination of the I n d u s t r i a l Revolution.
Keynes thus viewed the world e n t i r e l y d i f f e r e n t l y . Keynes saw t h a t the economic
forces, of production were motivated through i n t e r e s t r a t e s and investment r a t h e r
than consumption. Keynes was perhaps too deeply involved i n h i s personal world o f
investment t o see the other s i d e o f the s t r e e t . Keynes believed t h a t t o get GDP
to r i s e , i n t e r e s t r a t e s had t o be lowered t h a t would stimulate borrowing frcm banks
to buy the gccds and s e r v i c e s . Thus, he saw the Great Depression as a c o l l a p s e i n
t h i s demand.
Keynesian economics has been proven t o be f a l s e j u s t l o o k i n g a t the d e c l i n e
i n Japan. The i n t e r e s t r a t e s that f e l l to nearly zero d i d nothing t o r e s t a r t .demand
and because of the F l o a t i n g Exchange Rate System, there was an escape value - the
a b i l i t y t o borrow yen f o r next to nothing and invest i t overseas earning 600%
more and that would have no e f f e c t upon s t i m u l a t i n g domestic demand. By the T950s,
M i l t o n had moved away frcm Keynesian ideas he harbored i n the 1940s viewing t h a t
ignoring the money supply was a serious e r r o r .
9

M i l t o n broadened h i s v i e w
t o support the idea t h a t the demand f o r money and
v e l o c i t y was s t a b l e by t u r n i n g t o the long-term f a c t o r s o f education, h e a l t h and
income o f the family o r i n d i v i d u a l over decades - the saving f o r retirement approach.
M i l t o n a l s o attacked Keynesian ideas t h a t consumption rose and f e l l along with the
short-term inccme, M i l t o n argued t h a t people took a longer-term view t o t h e i r l i f e
and finances. M i l t o n was c o r r e c t , f o r there would be no market f o r L i f e Insurance
i f the view o T Ine' ^ i a i v i d u a l or~famiIy was""e3rtremeTy-short
viewed that consumption would he a l s o s t a b l e f o r t h e long-term expectations o f the
family o r i n d i v i d u a l .
I f we look a t the events o f the Great Depression, i t i s hard t o see how
Keynesian economics would have r e a l l y worked. I n t e r e s t r a t e s collapsed f o r three
primary reasons with no economic e f f e c t ; (1) the Fed d i d lower r a t e s , (2) there
was a f l i g h t t o q u a l i t y f o r c i n g short-term rates t o near zero as we have seen
r e c e n t l y , and (3) there was c a p i t a l f l i g h t from Europe during the e a r l y stages
due t o the widespread d e f a u l t s o f European government debt that a l s o impacted
domestic p o l i c y f o r c i n g i n t e r e s t r a t e s lower even i f the Fed d i d not want t o see
such a d e c l i n e . The Fed could not lower i n t e r e s t r a t e s t o stimulate the economy.
That w i l l o n l y help during b u l l markets where there i s "confidence" t o i n v e s t
f o r a p r o f i t i n any event. Lowering taxes d i d not r e a l l y matter because there was
no p a y r o l l tax u n t i l a f t e r World War I I and the r i c h were l o s i n g money p r o f u s e l y .
I f i n d i t hard a f t e r j u s t reading the memiors of Herbert Hoover and the serious
dbcumentation a v a i l a b l e t o prove t o me that Keynes would have helped. The massive
runs on banks took place on rumors t h a t FDR was going t o c o n f i s c a t e gold. He denied
that as absurd the night o f the e l e c t i o n . But the rumor p e r s i s t e d and l e d t o
massive hank runs. Hoover could not stop i t f o r i t was not a " c r e d i t " c r i s i s as
much as I t was a sheer f l i g h t t o q u a l i t y . The m a j o r i t y of banks f a i l e d a f t e r the
e l e c t i o n of FDR and h i s inauguration. Hcover wrote l e t t e r s to FDR pleading w i t h
him t o reassure the people he had no such plan. But FDR remained s i l e n t . Had the
Fed provided cash loans t o the banks, i t would have been f r u i t l e s s .
M i l t o n viewed the Great Depression frcm a money perspective. He was c o r r e c t ,
the fears and uncertainty o f the times l e d to hoarding o f gold. This no doubt
contributed t o what M i l t o n saw as a c o l l a p s e o f one-third of the money supply
during the Great Depression. I t i s hard t o imagine promising t o lower taxes
and i n t e r e s t rates would have much impact when the world seems t o be ending..
I b e l i e v e i t was Abe L i n c o l n who argued t h a t yon can f o o l sane o f the people
satis o f the time, but you cannot f o o l a l l o f the people a l l of the time. This i s
c l e a r l y a lesson p o l i t i c i a n s need t o l e a r n . The people do look t o the f u t u r e and
w i l l spend more of t h e i r income i f they " f e e l " t h a t t h e i r heme i s r i s i n g i n value.
When housing p r i c e s d e c l i n e , savings r i s e , because people do i n f a c t respond t o
t h e i r longer-term expectations. This brings us t o the guestion of t a x c u t s and
do they even work? i n 1964, a t a x cut was made and t h i s was viewed as a permanent
cut i n p a y r o l l taxes. The econcmy exploded and there was the great boom i n
mutual funds that l e d t o w i l d s p e c u l a t i o n with the h i g h i n 1966. By the time
we see the c o l l a p s e , there was f e a r about i n f l a t i o n due t o the spending f o r
the Vietnam War. i n 1968 Congress passed what i t marketed as a temporary t a x
surcharge t o stop i n f l a t i o n . True, consumers spent l e s s , but they drew down
savings to maintain t h e i r consumption, i n 1975, there was then a temporary
tax rebate t o s t i m u l a t e the econcmy going i n t o the Steep d e c l i n e f o r 1976.
None o f these changes i n temporary taxes d i d anything s i g n i f i c a n t . Where
the 1964 p a y r o l l tax cut took p l a c e and was perceived as permanent, there
we f i n d a surge of investment planning f o r the long-term as Friedman expected.
The e m p i r i c a l evidence suggests t h a t one-time rebates w i l l not s t i m u l a t e the
economy because the people are q u i t e f r a n k l y - not stupid' The o n l y h i s t o r i c a l
evidence of a t a x cut s t i m u l a t i n g the economy i s a permanent change not one-offs*
10

We are not concerned with the absurd arguments that the average person dees
not weigh the budget d e f i c i t when he i s buying eggs. These s o r t s o f c r i t i c i s m s
malign the i n t u i t i v e nature of the people as a whole. For example, when Paul
Volker r a i s e d i n t e r e s t rates t o unheard of l e v e l s t o f i g h t i n f l a t i o n i n the
e a r l y 1930s, my mother and her s i s t e r ran out and bought CDs f o r 10 years a t
' oariKs wTEn"" Interest' "rates^t^~abcufr"lT "percent".'She-did riot aslo me "any a d v i c e s
She i n s t i n c t i v e l y knew t h i s was a deal, o f a l i f e t i m e . For the next decade, they
made a fortune. D i d they weigh i n f l a t i o n r e l a t i v e t o the i n t e r e s t rate? Perhaps.
But they c l e a r l y d i d not see i n f l a t i o n as r i s i n g f a s t e r than the r a t e of i n t e r e s t
or they would have h e s i t a t e d as was the case d u r i n g the German H y p e r i n f l a t i o n .
Did they have a model? No! D i d they make some i n s t i n c t i v e d e c i s i o n based upon
personal observation without empirical data? a b s o l u t e l y . Sorry, t r y i n g t o impute
knowledge t h a t must be somehow q u a n t i t a t i v e on a professional l e v e l t o the
general p u b l i c , makes no sense. Sometimes we f o r g e t , t h a t i f enough l i t t l e o l d
l a d i e s run out and s h i f t t h e i r demand deposits t o long-term f i x e d r a t e s , they
do cause a c o n t r a c t i o n i n M1 as we c a l c u l a t e our world.
-

M i l t o n was c o r r e c t . Keynesian models promote i n f l a t i o n w i t h no o b j e c t i v e .

They are i n d i r e c t and may assume that an increase i n government spending w i l l be
i n f l a t i o n a r y , but t h i s i s j u s t not always t r u e , i f there are' external f a c t o r s
t h a t are o f f s e t t i n g the spending such as a c a p i t a l withdrawal frcm outside the
domestic econcmy. The assumption t h a t even w i t h i n a closed economy t h a t an
increase i n spending w i l l c r e a t e economic growth of a tangible nature i s a l s o
f a l s e - j u s t look a t the German H y p e r i n f l a t i o n . We saw the period of the 1fi7a
s t a r t of i n f l a t i o n d e l i b e r a t e l y created and targeted t o increase the money supply
by overvaluing s i l v e r r e l a t i v e t o gold, f a i l e d t o produce the expected r e s u l t
f o r gold was being drained by f o r e i g n investors r e p l a c i n g I t with s i l v e r u n t i l
the e n t i r e experiment l e d t o J,P Morgan having t o b a i l o u t the nation lending the
US Treasury gold. The d e l i b e r a t e c r e a t i o n of money that was cheaper than the
world sl^ndard, l e d not t o economic growth, but economic d e c l i n e i n a s i m i l a r
fashion t o the German H y p e r i n f l a t i o n o f the 1920s, but t o a much l e s s extent.
law J3

(Gresham's law)

BAD Money Drives Out Good

While Gresham"s Law was based upon a Gold Standard and t h a t by debasingthe precious metal content causes the hoarding o f higher content coinage,
i n a f l o a t i n g exchange r a t e system, i t s t i l l works by d r i v i n g r e a l wealth
out of a nation f l e e i n g t o another currency by c r e a t i n g excess currency.
Law #4 Only Permanent Reductions i n Taxes Produce Economic S t i m u l a t i o n
The average person may not understand fancy s t a t i s t i c s , but they w i l l a l s o
not be induced by f a l s e s t a t i s t i c s . The average person reacts according t o
t h e i r own personal view o f the econcmy, which i s why one-off t a x reductions
w i l l not have an econcmic impact but w i l l be hoarded f o r the r a i n y day
unless the average parson "sees" and ''expects" economic changes.
i n t e r e s t Rates - Taxes - Money Supply
So i s t h a t the Best We have Got?
As much as I respect M i l t o n Friedman, I must be honest. There are no p l a i n
assumptions t h a t we can t o l e r a t e , we cannot assume that v e l o c i t y w i l l remain a
constant because people w i l l hoard and f e a r spending i n times of econcmic d e c l i n e .
Likewise, l e t us not k i d ourselves t h a t r a i s i n g and lowering i n t e r e s t r a t e s w i l l
have any meaningful e f f e c t upon the econcmy o r the behavior of i t s p a r t i c i p a n t s .
11

S e t t i n g aside the accolades, the government could not help but lower i n t e r e s t
r a t e s during an econcmic d e c l i n e . C a p i t a l w i l l f l e e to government debt as long
as i t perceives the r i s k t o be i n the private- sector. Hence, c a p i t a l w i l l move
to the government debt bidding higher i n p r i c e f o r c i n g y i e l d s { i n t e r e s t rates)
to d e c l i n e . So Keynesian theory does not work.. I t i s assuming government has
soi^"efiS^
interest "rates s o
. a r t i f i c i a l l y high, p r i v a t e econcmic ccmnerce w i l l c o l l a p s e and government expenditures would r i s e sharply due s o l e l y t o i n t e r e s t r a t e s causing both the money supply
and econcmy t o c o l l a p s e . Lowering i n t e r e s t rates below world l e v e l s as d i d Japan
i n the 1990s, f u e l s c a p i t a l f l i g h t t o higher y i e l d s preventing domestic increases
i n money supply defeating any intended s t i i n u l a t i o n package.
_

Likewise, i f money supply i s j u s t increased assuming i t matters not how i t i s

increased o r spent, t h i s s o r t of untargeted wholesale spending w i l l promote i n f l a t i o n causing c a p i t a l f l i g h t t o other lands. Currently, there a r e proposals t o
spend money on i n f r a s t r u c t u r e . This i s a throw back t o Rcosevelt and the WPA. But
t h i s demonstrates how a l i t t l e - b i t o f knowledge can be dangerous. The WPA worked
because unemployment rose t o 25% during the Great Depression, when we were s t i l l
40% a g r a r i a n when there was a 7 year drought known as the ^Dust Bowl . Government
was s t i l l q u i t e small. The federal reserve was created o n l y i n 19T3 and there was
the I n t e r s t a t e Commerce Commission. There was no p a y r o l l tax and no s o c i a l s e c u r i t y .
Today, the growth i n government s t a t e and f e d e r a l has beccme n e a r l y that 40% l e v e l .
More government programs may k i l l the e n t i r e gcose b r i n g i n g back the good-old days
and the cccnplaints against Constantine the Great (306-337AD) t h a t there were more
' people c o l l e c t i n g taxes than paying them. For unemployment today t o reach 25%, i t
would r e q u i r e a c o l l a p s e i n governments throughout the s t a t e s and m u n i c i p a l i t i e s .
This becomes possible because we have the f e d e r a l income tax competing f o r revenue
against the s t a t e and. l o c a l e n t i t i e s causing the tax base t o c o l l a p s e In our modern-day economy, the k i n g has no c l o t h e s , but no one w i l l t e l l Mm.
Money i s created hy v e l o c i t y . This i s agreed upon by a l l persons. The leverage i n
the banks they created with t h e i r unregulated d e r i v a t i v e s markets between themselves
i s a t l e a s t 30:1. Our d e f i n i t i o n of money i s f a r too narrow today. I t cannot be
l i m i t e d t o demand deposits and cash. I t must include bonds, stocks, and a l l such
f i n a n c i a l instruments frcm money-market funds t o d e r i v a t i v e s . IfJ we stop i g n o r i n g
r e a l i t y , j u s t maybe we can f i g u r e out the r u l e s . J f d e r i v a t i v e s 'are not money, then
what were we so stressed about b a i l i n g out bankers? i t i s not r e a l ! Right? Poof 1
I t ' s not there as a magic t r i c k . We have t o stop d e f i n i n g money so narrowly i f we
rush t o b a i l o u t housing, banks, and manufacture but none o f that we consider money.
So how do we f i x what we do not even define properly'?
Once we accept r e a l i t y and ask the average person i f h i s house i s part o f h i s
assets he considers wealth, then we W i l l r e a l i s e t h a t the t r u e p i c t u r e o f money
i s what people b e l i e v e i t t o be - not what economists c l a i m . This i s why we a r e
b a i l i n g out the^mortgage-derivative c r i s i s , because i t i s money. Hence, i f the
e l e c t r o n i c money created by the p r i v a t e sector through v e l o c i t y includes the 30:1
leverage, we can see that increasing the money supply t o compensate f o r the d e c l i n e
i n the v e l o c i t y that was e f f e c t e d by the 30:1 leverage, brings i n t o focus the
problem of money supply. There i s no way t o increase the government spending by
30 times t o o f f s e t the d e c l i n e i n v e l o c i t y . Even i f we look a t a 10 f o l d increase,
i t i s s t i l l f a r beyond what could be absorbed. This type o f an increase i n money
supply would be h y p e r i n l a t i o n a r y t o say the l e a s t . I t would be wide spread t h a t
everyone would be influenced and c a p i t a l would then r u n t o t a n g i b l e assets and f l e e
government debt f o r c i n g t h a t a l s o t o go i n t o d e f a u l t or j u s t be monetised.
Because we are i n a g l o b a l economy, i f the Fed buys bonds t o i n j e c t c a p i t a l
i n t o the econcmy, those bonds may he held by f o r e i g n i n v e s t o r s who take the money
home. I f we lower i n t e r e s t rates so f a r , c a p i t a l w i l l f l e e t o other lands t o get
the higher y i e l d as what tcok place i n Japan. We l i v e i n a whole new world.

The Last Tool Standing

Obviously, we cannot j u s t create vast amounts o f cash and j u s t spend i t
w i l d l y without c r e a t i n g a wave o f i n f l a t i o n that would cause r e a l c a p i t a l and
wealth t o f l e e t o other lands. We cannot a r t i f i c i a l l y r a i s e o r lower i n t e r e s t
rates against the n a t u r a l trend without e i t h e r causing a competing f o r c e t h a t
a t t r a c t s c a p t t a r o r - f u e l s " the- a - s s e t r i n f l a t i o n N e r cari weTTrorr^nterest r a t e s
o r r a i s e them a r b i t r a r y t o world l e v e l s without causing c a p i t a l t o f l e e f o r
higher y i e l d s o r f o r e i g n c a p i t a l t o a r r i v e t a k i n g i n t e r e s t earnings home d r a i n i n g
domestic resources. I n t e r e s t rates & money supply a r e subject, t o g l o b a l trends.
This i s 'Why we have the tfew P r a c t i c a l "Laws" of Global Economics. We a r e not
alone and whatever we do w i t h money supply or I n t e r e s t r a t e s can a t t r a c k or r e p e l 1
both domestic and f o r e i g n c a p i t a l . We cannot continue: under f a l s e assumptions. We must
face r e a l i t y . Why d i d M i l t o n ccme l i s t e n t o me? Because where we may have disagreed
on the presumption t h a t the v e l o c i t y o f money was s t a b l e , we agreed on one point
t h a t stands behind these "Laws" o f economics. M i l t o n saw t h a t a f l o a t i n g exchange
r a t e system back i n 1953 would a c t as a check and.balance upon the governments of
the world. Many c r i t i c i z e d M i l t o n and thought he was nuts. But he was c o r r e c t . He
saw i n theory i n 1953 what I have witnessed i n p r a c t i c e . This i s were theory and
observation have met. Whatever we do, we w i l l e f f e c t the world j u s t as the world
w i l l e f f e c t what we do. This i s perhaps i m p l i c i t i n the "contagion" t h a t people '
see as the debt c r i s i s spread around the globe l i k e the l a t e s t s t r a i n o f f l u .
The money supply and i n t e r e s t rates a r e t r u l y created not by the man s i t t i n g
behind the c u r t a i n i n Oz. They a r e created by the i n t e r a c t i o n of the people and
how they respond t o both p r i v a t e and p u b l i c events that impact t h e i r long-term and
short-term f i n a n c i a l expectations. This i s the essence o f the " f l i g h t t o q u a l i t y "
d i c t a t e d by the I n v i s i b l e Hand, of Adam Smith, who wrote " i t i s not frcm the benevolence o f the butcher ... t h a t we expect our diner, but frcm t h i s ] regard t o [ h i s ]
own i n t e r e s t . " Wealth o f Nations, V o l I , p26-27 (Oxford: Clarendon ed_ 1976).
As already explained, both money supply and i n t e r e s t r a t e s cannot be confined
t o purely domestic impact. We cannot count on the "benevolence" o f f o r e i g n investors
or states t o simply buy our debt t o s t i m u l a t e our economy contrary t o t h e i r own s e l f i n t e r e s t s . We have t o respect i n t e r n a t i o n a l c a p i t a l flows o r we w i l l send our own
economy back i n t o the stone age. We cannot stimulate domestic issues e x c l u s i v e l y by
using purely i n t e r e s t r a t e s or money supply theory by government spending.
The l a s t domestic t o o l standing i s taxes. Here too, we can r a i s e taxes and send
c a p i t a l f l e e i n g t a k i n g w i t h i t jobs. But we can lower taxes t o create jobs domestically
as w e l l . Taxation i s a barbaric r e l i c of the past t o increase the money supply o f the
state (king) l i k e war. We a r e no longer on the Gold Standard so there I s no need t o
tax or wage war f o r p r o f i t when money i s e l e c t r o n i c anyway. We must d i s t i n g u i s h that
state a l o c a l government need t a x a t i o n because they l a c k the power t o create i t . They
must l e a m t o be competitive t o a t t r a c t jobs, but the Feds no longer need income taxes.
Money can be created i n a d i s c i p l i n e d manner. M i l t o n even suggested a negative tax r a t e
t h a t was an automatic, payment t o lower income t h a t enabled a steady increase i n
money supply. The p a y r o l l tax merely borrows from >the poorest i n t e r e s t f r e e and
then hands back a refund as i f i t were Christmas. The 1964 tax cut was a permanent
cut and t h a t sparked economic growth. One-off tax cuts i n troubled times never
worked because when confidence i s lew, people w i l l save r a t h e r than spend f o r the
future.
The only v i a b l e t o o l we have i s the f e d e r a l income, tax. The only way t o
spark a econcmic beem and create jobs, i s t o eliminate i t and make American labor
competitive. The jobs would pour back j u s t as Hong Kong grew because i t had only
13

a 15% tax r a t e that was lower than the r e s t of the world- There a r e those who
would assume t h a t i f government p r i n t e d the money i t needed t h a t that would be
i n f l a t i o n a r y . This i s a matter of d e f i n i t i o n . They forget that we i s s u e t r i l l i o n s
of d o l l a r s through our borrowing i n the form of bonds. However, i f bonds, stocks,
r e a l e s t a t e and d e r i v a t i v e s a r e outside of our d e f i n i t i o n o f money, then t h i s 18th
century t h i n k i n g makes sense. Sorry. I n the r e a l world a bond i s s t i l l money.
Between 1986 and 2006, the n a t i o n a l debt rose from about $2.1 t r i l l i o n t o
$8,5 t r i l l i o n . This tcok p l a c e not i n p r i n t i n g money, but i n bonds, i n f a c t , we
were forced t o issue more debt j u s t t o pay the i n t e r e s t on debt. The i n t e r e s t
payments f o r t h i s 20 year period was $6,141 t r i l l i o n . Had we p r i n t e d the d e f i c i t
between t a x a t i o n and spending (excluding i n t e r e s t ) , t h a t would have amounted- t o
only $259 b i l l i o n a f a r c r y from the b a i l o u t s . I f we a r e already committing b i l l i o n s
i f not beyond 1 t r i l l i o n f o r rescue, we cannot a f f o r d t o borrow oh top o f t h i s .
The very idea that we borrow money rather than p r i n t i t i s somehow l e s s i n f l a ^ t i o n a r y i s absurd and a throw-back t o the Gold Standard when nature c o n t r o l l e d the '
quantity o f money. Spain borrowed h e a v i l y on the g o l d i t expected from America. When
i t s treasure ships didn't show up and i t l o s t the Spanish Armada against England, the
d e f a u l t destroyed the bankers i n Venice and relegated both Spain and I t a l y to- almost
t h i r d world s t a t u s . The Spanish I n q u i s i t i o n merely caused the jews t o f l e e to Holland
t r a n s f e r r i n g henkinq to_ Northern Europe.- We. cannot a f f o r d the same mistakes. Borrowing
i s ; a'ahcient t r a d i t i o n when there was ho other choice .
The Gold Standard fi Cronic Shortage of Money
They say h i s t o r y i s biased - f o r i t i s w r i t t e n by the v i c t o r . But we can a l s o
remember things o f days long since past with rose-colored glasses. Some see gold as
almost a r e l i g i o n - the s a v i o r t h a t w i l l d e l i v e r us from the e v i l of i n f l a t i o n . That
i s j u s t not true. The boom-bust c y c l e existed i n ancient times as w e l l and always we
f i n d no matter what system i s i n place, there is- someone who .always spends too much:.
The Gold Standard was a world that was not so s i m p l i s t i c . I n ancient times,
i t provided the incentive f o r war - the best way t o increase money supply. I n
f a c t , one of the reasons there a r e so many ancient coins that have survived i s
there was the p r a c t i c e of burying the p a y r o l l before b a t t l e so t h a t the other
s i d e was denied the s p o i l s o f war.
The Gold Standard also meant t h a t the way t o create more money was through
reducing the metal content - debasing the q u a l i t y o f the metal. Those who were
l o o k i n g t o be dishonest had two options - f1) c o u n t e r f e i t i n g , o r (2) c l i p p i n g .
Take a c o i n out of your pocket and you w i l l see reeding on the edges of an
American dime o r quarter f o r example. This was an o l d a n t i - c l i p p i n g devices t h a t
was t o prevent those who would shave a l i t t l e o f f of every c o i n - c o l l e c t i n g a
p i l e o f scrap metal. This gave r i s e t o banks i s s u i n g notes t o a t f i r s t guarantee
the payment i n the proper amount of precious metals o f good currency meaning
u n d i p p e d coinage.
However, the greatest problem with the Gold -Standard was the i n a b i l i t y t o
create money other than war, a l t e r i n g contents, o r changing the r a t i o of s i l v e r
t o g o l d as the s i l v e r Democrats t r i e d i n the l a t e 1800s. The money supply was
i n the hands o f nature and thus was subject 'to boom and bust cycles based a l s o
upon t h e discovery of metal. The C a l i f o r n i a Gold Rush of 1349 contributed to the
econcmic boom t h
^
i 7_
a t

l e d

t o

P a n i c

e 5

The disadvantage of the Gold Standard was the i n a b i l i t y t o create a steady

new supply o f money t o keep pace w i t h the growth i n population and econcmic

T4

needs. Going back t o the Gold Standard i s not the answer t o long-term econcmic
growth nor would i t solve the current economic c r i s i s . In f a c t , i t would create
an econcmic contraction that would end f l e x i b i l i t y t o even deal with the problem.
This i s separate and d i s t i n c t i n s o f a r as gold p r o v i d i n g a p r i v a t e source of
wearth- that iemains a: stone o l tfalun.The resscgr-gold emerged- as meney-because I t
was a valued ccnmcdity and recognizable In a l l lands* They use gold f o r jewelry
i n India and China the same way they use i t i n Hussia, Europe, o r the Americas.
I t i s a scarce commcdity that there would not be enough o f i f every person i n the
world wanted j u s t 1 ounce f o r themselves. Whether o r not gold i s the " o f f i c i a l "
monetary u n i t o r the check against f i s c a l i r r e s p o n s i b i l i t y i s of no importance.
In the s p i r i t Of l i b e r t y , allowing gold to remain as the p r i v a t e s t o r e of wealth
i s f a r b a t t e r . That was the very i s s u e that Rcosevelt sought t o eliminate - the
a b i l i t y t o hoard gold as a hedge against government. This i s a l s o why Rcosevelt
confiscated gold so he could devalue the d o l l a r r e l a t i v e t o gold thereby any such
p r o f i t would d e f a u l t t o the government - not the i n d i v i d u a l hoarding the gold.
A l l th problems with the Gold Standard emerged- frcm the i n a b i l i t y t o
create money when needed. M i l t o n argued that the d e f i c i t spending advocated by
Keynes w u l d lead t o only i n f l a t i o n r a t h e r than econcmic growth. Ineed, Keynes
himself did not advocate perpetual d e f i c i t spending year a f t e r year. Once the
government received h i s b l e s s i n g , they J u s t r a n w i t h the b a l l , but the goal-post
was past decades ago. Locking at the Federal budget since 1936, th<> only years
i n which there was not a d e f i c i t were far and few between:
1947, 1948, 1949, 1951, 1956,

1957, 1960, 1969,

1996,

1999, 2000, 2001

During the 72 years between T 536 and 200S, there were only 11 yaars that produced a budget surplus. This i s not a very gocd record f o r Keynesian economics.
Once the concept of d e f i c i t spending was introduced by Keynes, i t was s e r i o u s l y
abused. But the problem was not so much the d e f i c i t , but the f a c t t h a t a t the same
time there was the pretense of maintaining a Gold' Standard at a f i x e d quantity of
d o l l a r s t o an ounce of gold while the supply o f d o l l a r s was being increased and
the g o l d supply was d e c l i n i n g . This oulminated In the f i r s t break with the two-tier
Gold Standard whereas gold began to trade on the London exchanges f r e e l y , that was
followed by the c l o s i n g of the gold window in 1971 wnen t h e r e were more d o l l a r s
than g o l d to redeem them. Hp r e a l i t y Of perpetual d e f i c i t spending under the Gold
Standard came home with shocking f o r c e .
The Bottom Line
A r b i t r a r y spending even on i n f r a s t r u c t u r e w i l l do nothing but create perceived
i n f l a t i o n before i t even h i t s the econcmy. The work programs o f the Great Depression
made sense only because there was a n a t u r a l d i s a s t e r i n the form of the .Dust 13owI
that l a s t e d 7 years. I t i s true t h a t unemployment rose t o 25%. However, i t was only
8.9% i n T93Q deep i n t o the s t a r t of the Depression. I t reached above 20% only when
the Dust Bowl destroyed jobs given we were s t i l l 40% agrarian i n our work f o r c e .
Unemployment began t o d e c l i n e w i t h the WPA, 1935 20.3%, T936 16.9%, 1937 14.3%, 1938
19% and 1939 17.2%, but as you can see, we have a s e l e c t e d memory f o r what r e a l l y
worked and what d i d not. unemployment i n 1940 stood a t 14.6% end a t the end o f
World War IT, i t was 1.9%. I t was not the WPA that changed the economy, i t was the
war. T h i s has l e d t o some c l a i m i n g a l s o s e l e c t i v e l y t h a t war i s good f o r the economy.
We began the f i r s t peacetime d r a f t i n 1940 t h a t was approved on September 14, T940
but i t was P e a r l Harbor on December 7th, 1941 that o f f i c i a l l y s t a r t e d the war f o r
Americana then declared war against Japan on December 8th followed by a d e c l a r a t i o n
against Germany and I t a l y on December 11th, 1941.
15

The WPA was i n s t i t u t e d May 6th, 1935. I t provided a v i t a l r o l e i n c r e a t i n g

jobs not l o s t by the c r e d i t c r i s i s i n the f i n a n c i a l markets, but by the Dust
Bowl. The c o l l a p s e of the Austrian C r e d i t - A n s t a l t i n May 1931, began a c r e d i t
c r i s i s contagion t h a t swept the world creating a wave of business f a i l u r e s as we
are seeing today w i t h General'Motors. Unemployment was the worst i n Germany h i t t i n g
5,6 mil T-inn.._nn__ig^2_while..Britain_was_2..7_million. These were the conditions that
not merely l e d to the e l e c t i o n of Rcosevelt i n 1933, but Adolf H i t l e r a l s o i n 1933.
From the September sanction of Germany i n 1936 by B r i t a i n and.France, I t was but
only about 3.141 years l a t e r t o P e a r l Harbor. The' US had declared i t s n e u t r a l i t y
i n Europe on September 5th, 1939 when Germany invaded Poland. I t was the war and
not our p a r t i c i p a t i o n t h a t ended, the depression, but we became the amis and food
dealers f o r Europe. By the end of the war, the US stood w i t h 76% of world gold
reserves. That created. American wealth - not p o l i c y o r even peacetime trade.
Tcday, i f we wage war, we spend our resources and the economy d e c l i n e s much
as what took place i n Europe. War i s good f o r the econcmy, only when you are the
arms dealer, not the aggressor. Tcday, the work force i s nearly 150 m i l l i o n . I f
we subtract the a g r i c u l t u r a l sector from the Great Depression, unemployment h i t
a t about 10%. Since 1995, the US unemployment r a t e i s between 4%~6%. But t h i s
i s a l s o not a f a i r view of the econcmy. As of 2005, f e d e r a l government c i v i l
employment i s about 2.7 m i l l i o n . The m i l i t a r y personnel i s about 500,000 (Army),
54,000 (Wavy), 353,000 ( A i r Force, and 20,000 (Marines) w i t h about 41,000 (Coast
Guard). T h i s brings the f e d e r a l government consumption o f labor to about 3.7 m i l l i o n
o r about 2.4% of the c i v i l work force. Outside the Great Depression, the worst
bout of unemployment came i n T975 when i t h i t 8.5% a n d d i d n o t drop below 7% u n t i l
1987. The peak during the econcmic d e c l i n e between 1 9S0 and 19S5 took place i n
1985 at about 7.2%. We d i d see 7.5% f o r 1992 t h a t l e d t o a b r i e f popular movement
f o r Ross Perot and the v i c t o r y of B i l l C l i n t o n i n the P r e s i d e n t i a l e l e c t i o n s . To
reach 25% today, we would see sweeping p o l i t i c a l changes and massive p o l i t i c a l
unrest. I t would be impossible without the collapse of s t a t e and l o c a l governments
since we see t h a t a g r i c u l t u r e accounts only f o r about 3% c u r r e n t l y .
The US Gross Domestic Product ("GDP") i s now about $15 t r i l l i o n annually. I f
we assume the high s i d e of a budget f o r one year w i l l be $3 t r i l l i o n , the t o t a l
f e d e r a l tax c o l l e c t e d stands a t about 17% o f the GDP. I f we spent t h a t same amount
o f money on i n f r a s t r u c t u r e , by the time that f i l t e r s i n t o the economy, the e f f e c t
would be t o o - l i t t l e - t o o - l a t e . We would need another l a y e r of oversight and costs
t o even arifriinister such a p r o j e c t . I f we simply eliminate the f e d e r a l tax c o l l e c t i o n ,
t h a t would be an immediate shot i n the arm. But t h i s tea would f a l l short unless
the people see t h i s as a permanent reduction. Companies would not r e l o c a t e f o r a
mere one-off reduction, what we need i s a three-punch s o l u t i o n .
We already know t h a t i n t e r e s t rates and wholesale increases i n the money supply
w i l l not.be l i m i t e d i n scope to the domestic econcmy. Whatever we do t o r e l i e v e the
econcmic pressure (lower i n t e r e s t rates - o r - increase spending), i s more l i k e l y to
cause f o r e i g n c a p i t a l to f l e e . This w i l l f u r t h e r contract the domestic mcney supply
and would most l i k e l y prolong the econcmic depression.
We must consider what seems to be the most r a d i c a l s o l u t i o n , but i n 21st Century
econcniios instead o f 18th Century, i t i s f a r more targeted and p r a c t i c a l . I f we
e l i m i n a t e the f e d e r a l income tax and stop the rorrowing, we can jump s t a r t the
econcmy and provide that boost to confidence t h a t the permanent tax cut d i d i n
1964 ccmpared to the unsuccessful one-off tax cuts t h a t went more to increase
savings than spending.
We cannot l o s e s i g h t of the f a c t that the f e d e r a l government i s new a l s o
competing f o r tax d o l l a r s against the states and c i t i e s who are now i n t r o u b l e
16

and cannot create money as the f e d e r a l government can do. Unless we now consider
a 21st Century d e f i n i t i o n & s o l u t i o n , then the 18th Century theories w i l l cover
the speculative losses f o r investment banks, not Wall S t r e e t , and create only work
prcgrams f o r stock brokers and programmers t o learn how t o f i x bridges and roads.
That seems one way t o lower s k i l l s opposite o f the p o l i c y of the WPA i n 1935.
-";gy >^gl^f^^^^g^^d^^^^TOpa:^^
:

(1.) W i l l s i g n a l a permanent and immediate change t o the

p u b l i c r e s t o r i n g "confidence" i n the future and w i l l
r e s u l t i n immediate econcmic r e l i e f .
(2) W i l l s h i f t the tax t o make d ernes t i c labor cheaper
whereby corporations who move offshore would then be
Subject t o t a r i f f s and excise taxes but not on domestic
labor depending upon what nation they moved t o .
(3) Eliminate the ccenpstition w i t h the states & l o c a l
government t h a t w i l l only be p e t i t i o n i n g f o r b a i l o u t s
o f t h e i r own, f o r as r e a l estate p r i c e s d e c l i n e , .the tax base
w i l l implode creating a contraction i n revenues f o r c i n g
the s t a t e s and l o c a l government t o . l a y o f f workers.
(4) Eliminate the high costs of c o l l e c t i n g taxes we do not
need due t o the evolution of what we define as money.
(5) Eliminate the cost' and delay i n c r e a t i n g a new a d m i n i s t r a t i o n t o
oversee some s o r t of program that would take years t o a c t u a l l y
produce any economic e f f e c t , whereas simply r e t u r n i n g what was
received i n inccme taxes (not s o c i a l s e c u r i t y ) i s a clean way t o
jump-start the econcmy - immediately!
a.) To those who w i l l argue Marx's philosophy t h a t the
r i c h w i l l get more, w e l l they a l s o paid more, and
i t i s t h e concentration of c a p i t a l t h a t creates the
pool of funds t h a t banks then lend t h a t w i l l e l i m i n a t e
the c r e d i t crunch. I f scmeone has $1 b i l l i o n i n cash
and he i s now enticed t o deposit i t with a bank because
we a l s o w i l l e l i m i n a t e the $100,000 FDIC l i m i t a t i o n
t h a t prevents b i g money from being l e n t out and merely
insure a l l deposits because we i n s t a l l b e t t e r r e g u l a t i o n
to prevent gaps with unprecedented leverage, then we
should have no problem securing a l l deposits, t h a t w i l l
suddenly a t t r a c t c a p i t a l from around the world as w e l l .
This w i l l benefit the average wage earner and stop the
Marxian that caused both Russia and China t o see the l i g h t
t h a t we remain blind, p r e f e r r i n g t o l i v e i n the dark.
II.)

Elinrijrate the N a t i o n a l Debt ByMonetigation

(1) FDR confiscated gold so he could devalue the d o l l a r . This was
l i m i t e d t o the times because we were S t i l l on a Gold Standard.
By monetizing the debt, we would not create a dramatic change
i n i n f l a t i o n because i n the r e a l world, when we i s s u e bonds,
we may not define that as "money" i n terms of M1, but i n the
p r a c t i c a l perspective, we look a t how much we owe and judge that
as money issued regardless o f what we c a l l i t .
(2) Between 1986 and 2006, the i n t e r e s t expenditures to'keep the debt
i n place accounted f o r almost 72% of the increase i n the debt. We
are funding our mortgage w i t h a V i s a card.
T7

(3) Those who b e l i e v e t h a t t h i s would he i n f l a t i o n a r y are j u s t

misguided f o r the marketplace already sees the same amount
of d o l l a r s held as assets i n the form o f bonds and r e p l a c i n g
t h a t same amount w i t h d o l l a r s w i l l save as we have seen 72%
o f the o v e r a l l growth i n debt t h a t we could never repay i n
.... . .ariy._eient.^anj3_no_.jjc^
believes they w i l l i n
f a c t pay o f f t h e i r ' d e b t f o r that would be a contraction o f
money supply unprecedented to date,
(A) E l i m i n a t i n g the Insurance L i m i t a t i o n at the FDIC
(1) There i s no reason why we should not. insure a l l deposits i n
commercial banks, f o r t h i s would replace government debt
and make vast sources o f cash a v a i l a b l e f o r lending and would
eliminate the c r e d i t crunch overnight.
12)

I f we insure a l l commercial bank deposits, t h i s w i l l a l s o

a t t r a c t f o r e i g n c a p i t a l i n c r e a s i n g the c a p i t a l reserves f o r
lending.

(3) Investment Banks should be excluded f o r they are higher r i s k

and not part of the " r e a l " ccmmerical network with l o c a l
branches t h a t s e r v i c e the community. Those who wish to deal
with such banks should a l s o s u f f e r the higher r i s k f o r higher
yield
a. ) There must be a s i n g l e regulatory bcdy w i t h no gaps i n the
r e g u l a t i o n where the greatest danger has h i s t o r i c a l l y been
the leverage.
b. ) There must be transparency and only openly regulated exchanges
where counter-parties- must have the asset to support the
p o s i t i o n , not mere reputation.
(B) S o c i a l S e c u r i t y Reform
(1) By e l i m i n a t i n g the borrowing and t a x a t i o n at the f e d e r a l l e v e l
considering the income tax ( d i r e c t t a x a t i o n ) , t h i s w i l l a l s o
automatically r e h a b i l i t a t e the S o c i a l S e c u r i t y program and make
t h i s i n t o a r e a l savings p l a n t h a t would then invest the funds
becoming a n a t i o n a l wealth fund t o a l s o enable i t to face the
entitlements ccming sooner than l a t e r where the p u b l i c a l s o have
l o s t f a i t h i n ever seeing a r e a l d o l l a r .
(2) Once freed from the investment i n government bonds, t h i s fund
can create tremendous economic progress f o r the future by even
a l l o c a t i n g 3% f o r venture c a p i t a l i n s i z a b l e new innovations
t h a t w i l l g r e a t l y advance medicine, science, and technology.
I I I . ) N a t i o n a l Health-Care Program
(11 We need t o e s t a b l i s h a n a t i o n a l health-care program f o r a l l
t h a t w i l l r e l i e v e the ccming c r i s i s i n pension funds of c i t i e s ,
s t a t e s , f e d e r a l government, and corporate America. The costs are
so steep, even s e r v i c e jobs are l e a v i n g f o r a s a l a r i e d employee
c o s t i n g $50,000, ends up c o s t i n g on average $125,000 between taxes
and health-care along w i t h pension costs.

(2) We cnust face the f a c t s , that the purpose o f society i s the

cooperative e f f o r t s of s o c i e t y t o seek lower costs and
s e c u r i t y , not much d i f f e r e n t why people were w i l l i n g t o be
a s e r f so t h a t when danger came, they got t o run behind the
w a l l o f the c a s t l e .
(3) A n a t i o n a l heath-care program i s v i t a l t o our s u r v i v a l f o r
the costs are r i s i n g so r a p i d l y , corporates are passing those
costs on t o employees and the g u a l i t y o f l i f e i s c o l l a p s i n g .
(4) We must stop the nonsense, pass tort-reform, stop the crazy
l a w s u i t s , and the costs w i l l come back i n l i n e t o where they
once were 20 years ago when small companies handed out healthcare t h a t covered the whole family o f every worker. The lawyers
w i l l f i n d another area t o e x p l o i t , o r perhaps they too have t o
t i g h t e n t h e i r b e l t f o r the gocd of the n a t i o n before we don't
have one anymore.
(5) E l i m i n a t e trade b a r r i e r s t o cheaper drugs from Canada and force
them back i n l i n e as w e l l . This i s our future we are t a l k i n g
about, we have seen what the investment bankers d i d t o the
econcmy w i t h t h e i r outrageous leverage and unregulated shadow
markets, l e t us not wait u n t i l h o s p i t a l s close because people
can no longer a f f o r d health-care,
(6) We need urgent a t t e n t i o n f o r as unemployment r i s e s , c h i l d r e n
w i l l now d i e f o r the "greed" of t h i s industry i s destroying
the very t h i n g they claim t o be p r o t e c t i n g .
SUMMATION
This three-punch s o l u t i o n i s c r i t i c a l t o our s u r v i v a l . We must respect t h a t
there are j u s t s c ^ t i m e s i n h i s t o r y t h a t we have a choice t o make a r e a l e f f o r t
to change the trend, o r t o b u l l s h i t our way around the f a c t s o n l y t o postpone the
r e a l i t y . No one expects the n a t i o n a l debt t o ever be paid, we can continue t o l i v e
i n our 18th Century world and pretend that I f we p r i n t the money i t w i l l he seme.
how more i n f l a t i o n a r y than p r i n t i n g bonds and spending 72% mere t o keep them going
when there i s no p l a n t o ever r e t i r e than anyway.
I t i s time t o create a c o n t r o l bum before we explode frcm our own nonsense.
I t i s not t o l a t e t o save the day. But we have t o . s t a r t t o make r e a l i s t i c plans
and address the honest issues. The Investment Bankers have blown-up t h e i r world
as they always do. They have never got i t r i g h t even once I They create models that
ignore the b i g events because they thought they don't happen t h a t often. Well i t
happened' and now they are begging t o cover t h e i r losses. Healthcare and the wave
of entitlements i s going t o h i t shore l i k e a tsunami. Are we going t o j u s t once
plan f o r the future, o r i s democracy the worst k i n d o f government because there
i s too much t a l k and no action?
J u s t f o r once, l e t use update our d e f i n i t i o n o f what i s money and we w i l l see
that p r i n t i n g d o l l a r s o r bonds i s r e a l l y the same t h i n g except bonds are the g i f t
that we keep having t o pay f o r generation a f t e r generation. End the stupid borrowing.
We ate rot i n Os anymore. Gold i s not money. Let us s t a r t understanding the modern
world we l i v e i n today.
M a r t i n A.

Armstrong

ArmstrcngEccnoJ7iics@GMail .com
19