Saturday, November 22, 2008

Trouble at the Lemonade Stand

Sometimes it helps to illustrate a concept by breaking it down to its essential parts. A sort of elemental examination of the thing. So it is with understanding how money works - a simple illustration can make it easier to grasp a new concept. All you have to do is to learn a little of the language used to describe the new idea and you will see why this system cannot continue unless we fix the glitch in the way we create money and finance infrastructure.
There is a myth floating around, it's being repeated by some, and it goes something like this: If you borrow $100 and the interest is $50, there is a way to turn that $100 into $150 to pay your debt.
Is that true? Let's see.
To further illustrate, I recommend that the first few times through, you get two items - say, 2 chess pieces of opposing colors, or a cup and a glass, or a paperclip and a rubber band - anything small and different. These two items will represent the two main characters in this little episode: Owner and Bank. You can also add any props to this that you like, in order to make it easier to follow.
Next, get 5 small pieces of paper (Post-It Notes work well). Write "$50" on two of the pieces of paper, write "3 gallons of lemonade" on two of the pieces - with the fifth piece, keep track of who owes whom, as the story progresses. Move the $50s and the lemonade around as you follow the story and you will be confident, as you should be, that $100 cannot "turn" into $150 and this myth will be dispelled.
Ready to squeeze the juice out of this myth?
Let's start with the participants:
1. Owner - of the lemonade stand (one of the chess pieces or a cup, etc.)
2. Bank - the only place to get money, and then only as a loan (the other piece or glass)
3. Loan - $100 (the principal), to buy lemons ($50 on a Post-It + $50 on the other Post -It)
4. Interest - $50. What you owe (in addition to the $100) for borrowing from Bank
5. Debt - total of what you owe (principal + interest)
6. Teller - takes the payments for Bank
So, Owner wants to start a lemonade stand. He has no money and needs some lemons - and Owner has no debt - so he can borrow. So, he does. He takes out a $100 loan from Bank, to buy some lemons. Bank creates the new money on his computer when he enters it electronically into Owners checking account. Interest on the loan is $50 (interesting how, on even the simplest of examples, there is ALWAYS more debt [$150] than there is money [$100]).
Coincidentally, Bank sells lemons too! Owner buys $100 worth of lemons from Bank. Owner then makes 6 gallons of lemonade.
SCORE: Owner is $150 in debt, has $0 (he spent his $100 loan on lemons), has 6 gallons of lemonade (his "production"). Bank has $100 from selling lemons.
<< take a breather and re-read that if you need to - I did! Many times.>>
Owner owes $150 to Bank, so, he had better get busy and sell some lemonade! Fortunately, Bank likes to drink lemonade and buys 3 gallons of lemonade for $50 - he uses $50 of Owner's debt (the $100 that Owner borrwoed to buy the lemons) to make the purchase. Owner, glad to have made a sale, takes the $50 across the lobby to Teller. Owner makes his first loan payment of $50. Teller takes the $50 and applies it to Owner's principal. Principal payments, according to the Federal Reserve and the Congressional Research Service, are "extinguished" from circulation, so, that money is gone - it disappears, it's extinguished (it's OK to stick the Post-It under the table for now, if you're keeping track that way) .
SCORE: Owner is now $100 in debt, has $0, has 3 gallons of lemonade (his production). Bank has $50 left after buying 3 gallons of the good stuff for fifty bucks, and is cooling off, drinking the lemonade.
Owner notices that Bank is drinking the last drops of lemonade. Bank wants more. Owner offers to sell Bank the last 3 gallons of his lemonade. Bank agrees and buys the last of the lemonade for $50. Bank drinks the rest of the lemonade. Owner takes the fifty bucks, walks over to Teller and makes a payment of $50. Teller applies the $50 to principal and that money is extinguished from circulation.
SCORE: Owner is still $50 in debt, has $0, drank none of the lemonade, has no lemonade to sell, can't borrow any more because he has too much outstanding debt and can't work for the bank to get the last $50 he owes, because the bank has spent the $100 it created, on lemonade! - Owner is bankrupt. Bank has $0, drank all of the lemonade and is still open for business. But, Bank now has "bad debt" on his books and if too many lemonade stands fail, Bank may fail! Perhaps he needs a bailout. Either that or fix the problem. Which would rather see happen?
**RISK/REWARD: Owner took all the risk, did all of the work, drank no lemonade and ended up losing everything. Bank took no real risk - he created the money out of nothing on a computer in the first place, did none of the work, drank all of the lemonade and is ready to help another "customer" - provided Bank's "examiners" don't claim he has too much bad debt and threaten to close him down. Do you think Bank would ever feel pressure to "cook the books" to avoid being shut down? Naaa. If that happened, perhaps Owner would give him a "bailout"?
If that system seems just or even workable to you - STOP READING!
We cannot help you.
If that system seems unjust to you and in need of an "upgrade", read on.
Some well meaning people might say, "Yeah, well, it doesn't work like that if you pay the interest first".
Oh. OK.
Let's see what happens when the INTEREST is paid off first (you know the basics of the story, so we'll abbreviate further).
Owner needs money for lemons - borrows $100 from Bank, buys $100 in lemons from Bank and makes 6 gallons of lemonade. Bank takes the $100 in payment for the lemons.
SCORE: Owner is $150 in debt, has $0 (he spent his $100 loan on lemons), has 6 gallons of lemonade. Bank has $100 after selling lemons and is a bit parched after all the loan work - hopes he can buy some lemonade.
Owner notices that Bank is thirsty and sells 3 gallons of lemonade to Bank for $50, takes the fifty bucks, goes to Teller and makes his first payment - Owner asks Teller to apply it to the INTEREST on the loan. Because that is not a principal payment, but, instead, an interest payment, that money is not extinguished; Bank considers it "profit".
SCORE: Owner has $100 in debt, has $0, has 3 gallons of lemonade left to sell. Bank has $50 left from the lemon sale and after buying 3 gallons of lemonade, plus Bank has $50 in "profit"; mmm... good lemonade.
Bank is still thirsty and buys the last of the lemonade from Owner for $50. Owner is desperate and takes the $50 and runs to Teller to make a payment. Teller applies the $50 to principal and that money is extinguished.
SCORE: Owner is still $50 in debt, has $0, never did have any money that was really his, did all the work, has no lemonade to sell (no production) never got to drink the lemonade, and is bankrupt. Since he has no production to sell, the only thing left is to perform a service, but the money he would make would just go to pay the rest of his debt and he would have done all the work and never gotten any benefit! You can imagine that it's about at this time that some Owners walk away from this type of "deal" from Bank - when, all Owner wanted to do was make enough money for his family, his retirement and his favorite charity, it seems he ends up with nothing or worse.
**RISK/REWARD: Owner took all the risk, did all of the work, drank no lemonade and ended up losing everything. Bank took no real risk - the money was created out of nothing on the computer!, did none of the work, drank all of the lemonade, has $50 in "profit" and is ready to help another "customer" - provided Bank's "examiners" don't claim he has too much bad debt and threaten to close him down. Do you think Bank would ever feel pressure to "cook the books" to avoid being shut down? Naaa. If that happened, perhaps Owner would give him a "bailout"?.
Owner realizes that this system needs to be upgraded.
Owner supports The MINNESOTA TRANSPORTATION ACT authorizing the monetization of infrastructure (gives Bank the legal OK to make money that is not debt, whenever new infrastructure is built - like the US Constitution says, so that everyone gets to benefit).
Owner applies for financing and is approved (jobs created). He hires an authorized engineer and architect (jobs created) to design his lemonade stand. That is also approved (jobs created). He hires a contractor (jobs created) who hires a team (jobs created) to build the lemonade stand.
Bank creates new money, just like he did before, on the computer, but with one exception - Bank does not create it as a debt. It is not a loan.
Inspectors (jobs created) are on hand for the building of the lemonade stand, to ensure that it is a solid project. Owner's project is a really smart one that everyone wants to see completed and showcases his entire community as a modern, positive, forward thinking and pro American example of business - it's worth at least $200. Bank electronically deposits $200 into Owner's checking account and Owner pays his hired help. Then Owner buys $100 worth of lemons from anyone that has the best lemons. Since there is neither debt nor interest in the equation, Owner can drop the price to what it should be, instead of trying to inflate the price of the lemonade, in an attempt to get out of debt. Bank has lots of money to buy all the lemonade it wants because more people are able to pay off their loans. Owner has $100 left, and can send his children to lemonade school, with enough left over to take his spouse on a little trip and even save some money for later!
They all spend the new money that is debt free, interest free, tax free and inflation free, into the economy - where it belongs and where it stays!. After all, the people did the work, it's only right that they get the fruits of their lablor.
We call that "Clean Capitalism" because the people own the means of production (the business), the production (the stuff the business makes) and their money (the fruit of their labor). It's not Capitalism if the people do not own their money. Now, the way our current system is, we don't. We don't own our money, so we can never own the means of production, therefore, to that degree, we are not engaged in "capitalism". Do you think it's right to change that?
It's not socialism - because the people, instead of the government, own their own lemonade stands and set their own prices based on competition and the market mechanisms that hold balance in a dynamic economy. If citizens want wealth, for the first time in their life, there would be enough of it around, that if they wanted to work for it, they could have it - but no give-aways, that's not right either.
It's Clean Capitalism because the people really do own the "means of production" (their property, their businesses, and their money too!). .
Bad for families.
Bad for working Americans.
Bad for business.
Bad for banking.
Bad for government.
Every illustration breaks down eventually; this one is no exception. After all, we are talking about infrastructure and not lemonade stands, but, for the sake of demonstrating a concept, you get the idea.
A real solution who's time has come.

Thursday, November 6, 2008

The Songbooks

– a very short story.

Once, there was a good pastor who set out to build a church in a small community. He wanted some songbooks for his congregation, so that they could sing some favorite old hymns. 

The songbook salesman came by the church one day, “I can get you some songbooks”, he said. “Why, if you simply sign here, I’ll loan you ten songbooks right now, as long as you pay them back to me later.”

“Well, now, how would that work?” the pastor said. 

The salesman was quick to tell him, “You get the songbooks that you need now, and I’ll let you pay me back later, plus a little of what I like to call ‘interest’, for my trouble, of course. Clearly you can see how fair that is, since I will be out the use of the songbooks while you have them.”

The pastor said, “Well, that sure would get me the songbooks I need, and at least we could use them right away, but how would you like me to pay you the interest?”

The salesman responded, “Why, of course, you must pay me in songbooks – after all, I am in the songbook business. I’ll loan you ten to use now, and later you can pay me back those ten, one book per month, plus an extra one at the end, that’s the ‘interest’, until your obligation is fulfilled.”

The pastor had no songbooks, and it seemed that the salesman had them all, so he agreed, and went ahead with the deal. The good pastor singed a piece of paper promising to pay the salesman; at least, his congregation could begin singing the songs that they love!

The salesman went out to his van and made up some brand new songbooks and promptly set them in the pastor’s office. Then, he left.

Soon, the pastor began to think about the deal that he had made with the salesman. He began to realize that while he had songbooks today, he would have to pay them all back and be left with none – the same problem he was trying to solve! He was also troubled by the prospect of not having the eleventh songbook with which to pay his ‘interest’, and concerned about how he might get it, in order to meet his obligation. 

Soon, though, it was time for the congregation to meet and sing. And sing they did.

The first few weeks went by and everything went wonderfully. Everyone had a songbook and the fine singing really made the church a joyous place to be.

It wasn’t long when, after the fourth month, or so, as the payments were made to the salesman by returning the loaned songbooks, one at a time, a few people had to share their songbooks with their neighbors; they didn’t mind, though. 

The pastor got the salesman on the phone, “Say, I’m running short on songbooks, so how am I supposed to pay the interest – you know, that eleventh songbook that was never created?” 

The salesman suggested to the pastor that they might try singing harder; he had read once that maybe that would help them somehow to be able to meet their obligation. 

Or better yet, they could invite another church to sing some day and charge them a songbook for admission, that way they would be able to pay. Apparently, the salesman had been making new songbooks and loaning them to others, too. 

The pastor reasoned, “That would put the other church at a disadvantage, seeing that they would be two songbooks short – the one I would get from them if I charged admission, and the one they owed - as interest!” He rejected the idea. 

Several months passed and as the small church continued to pay on their debt, they found themselves in the middle of a sever shortage of songbooks.

The next time the good pastor and the church met to sing, they were huddled into a circle so that they could each try to see the words and music of a single songbook, at the same time. Some people had to learn to read the notes upside down! Even though they could still sing, it was nowhere near as enjoyable as when there were enough songbooks to go around.

A deacon came to the pastor with an idea and said, “Maybe we can borrow some more songbooks from the salesman?” 

The pastor said, “But we are so close to being out of debt to the salesman; with only two more payments, we are almost there!” 

“But pastor, we only have one songbook left, how will you make our final two payments with only one book?” the deacon said.

The pastor thought to himself, “That is an excellent point.”

The pastor made a quick phone call to a neighboring church, “Sister, can we borrow a songbook?” 

She said, “I suppose so, the nice salesman just loaned us ten of them. But, if you use it to pay the interest that you owe to the salesman, how will we get it back? ” 

The pastor agreed. He could not returned the sister’s songbook if he used it to pay interest to the salesman. Another unacceptable option.

So, the good pastor, needing more songbooks, reconsidered the deacon’s idea of borrowing ten more songbooks from the salesman. Of course, he would use one to pay the interest on the first ten he borrowed – then that deal would be complete. 

But, then, with the remaining nine songbooks - and owing a total of eleven – he would be short two songbooks this time around. It became clear to him that he would be going backwards. 

What’s more, if he did this over the years, several things would happen. First, he would always owe more songbooks than he had. Second, even if he borrowed from another church, he could not get out of debt and have songbooks, and neither could the other neighborhood churches. Third, if he charged visitors from another church for an honest service, like singing, he would leave the other church short of songbooks. Fourth, he understood that the congregation was finding the singing to be a bit less enjoyable and all of this started about the same time as the first loan from the salesman.

The good pastor prayed about it. He recalled, “a just weight and measure” and “do unto others” and decided to take a bold step. He reviewed the official church documents and discovered that he could create his own songbooks! And so he did. 

He created enough songbooks to pay off the salesman, provide for his needs and even help the neighborhood churches get out of the salesman’s debt. 

Soon, everyone had a songbook and the joy of singing was returned to the small city church. The salesman even made a little profit - and it only took a few of the church leaders to fix the problem. 

Moral of the story: Never borrow at interest, that which you should be creating yourself. That goes for a nation’s money supply, as well as a songbook.