MONEY

Published by at 6:04 pm under Economics

A) Inflation

“Rising wages and prices don’t cause inflation. Wages and prices inflate because the currency is debased – made worth less – and a seller needs to charge more for his product or service in order to receive the same amount of standard value as before.

The process is somewhat more complicated today than it was in the olden days when base metal was added to make more ‘gold’ and ‘silver’ coins, but the principle is the same.

Since states still monopolize the control of money, it follows that a state’s governors cause inflation. They are the only ones with the positional authority to debase a nation’s money.

Legitimate government revenues are taxes and fees for service. These taxes and fees are a portion of all the revenues earned by a nation’s productive people and can be considered to have an “earned” aspect. However, when governors spend more money on current expenses than legitimate revenues can cover, they have to borrow it. This “unearned” borrowed money is the phony, fiat, funny money that debases a currency. An “unearned” artificial increase in the supply of money, that hasn’t come from the productive earnings of a nation’s people, dilutes the purchasing power of all the nation’s money.

When governors plan to spend more than legitimate revenues, they are planning to debase the currency (and increase direct government debt). In many of the crazy years, as much as 30-35% of Canadian government spending was borrowed money. In one Trudeau-Liberal year it was 50%! In only one of those 40 years did legitimate revenues cover spending. Lunacy!

Canada’s governors are currently warbling about surpluses. We don’t have surpluses, we have about $900 Billion of debt – that’s nine hundred thousand million dollars – accumulated over 40 years of grossly irresponsible spending of borrowed money.

Progressive-Liberal governing elites dislike all standards, particularly any fiscal standards that could prevent them from fabricating the funny money they need to pursue their socialistic agendas.

All over the world, and not just during the crazy years but during the millennia that money has existed, most governors have proven themselves abysmally unfit to manage their nation’s fiscal affairs responsibly. They have abused their positional authority over the state’s monopoly control of money. They have simply been unable to resist taking the easy path of using borrowed money to pay for their wish lists and the legitimate service needs of their communities.

Fortunately for the world, there were enough sensible economists like Von Mises, Hayek, Friedman, and Canadian Robert Mundell, who were pointing out that the emperors had no money and that balanced budgets, sound money and lower taxes were the key to permanent prosperity

An even more effective measure would be to de-nationalize money – make money as impartially neutral as time, numbers and letters.

B) A Standard Gold dollar – As Sensible As Standard Time

National sovereignties are not threatened by the fact it is the same time in Toronto and New York. A nation’s independence is not put at risk when its people use numbers and a numerical system that came to the world from India via Arabia. Cultural identity is not jeopardized by the fact that the same 26 letters can be used to create an infinite variety of communications in a multitude of languages.

We hunger for standards to simplify our lives. We use standard chips, transistors, discs and tapes, and a host of other instruments and components all over the world. (If only we could establish a standard electric outlet, we’d be able to use our shavers anywhere!)

The answer is to move to a global “gold dollar”. Simple, universal, completely neutral, apolitical and objective. Over time, it is likely the people of the world would shorten the name to just “dollar”.

The price of gold would not be pegged – the gold dollar would be pegged to the world market price of gold at any given moment.

National central banks could be eliminated, for, with a single money unit serving the needs of nations, companies and individuals, the world would only need a single standards/credit rating/currency board and a mint to produce the relatively small amount of paper currency needed for cash transactions. (Most transactions are already conducted without currency via cheques, drafts, money orders, credit cards, electronically, etc.) National governments could continue to mint small change in 1, 5, 10, 25, 100, 200 and 500 cent, centavo, centime, penny, pfennig, pence, yen, won, yuan, whatever, coins that would also be parts of or whole gold dollars. The central world mint would issue paper gold dollars in higher denominations.

Governors would no longer be able to debase their currency and beggar their people. Traders would no longer be able to debauch a nation’s currency and beggar its people.

It is finally time to end more than two and a half millennia of monopoly control of money by irresponsible, unfit governors of states.

If political party representatives or dictators cannot be trusted with the control of money, neither should it be controlled by a handful of self-anointed “experts” from the banking/financial community.

The only safe trustee is the collective judgment of everybody involved in buying and selling gold on any given day. The price of gold is subject to a multitude of individuals’ supply and demand circumstances. Over thousands of years, gold has proven to be the stable, safe-haven standard to which departees have always returned after venturing into the speculative “bubble” waters of floating, non-standard-based exchange rates.

For several weeks in 1999, eminent financial experts again debated the merits and demerits of a single, standard world currency. Sometimes the issue was discussed in tandem with returning to the gold standard. Some urged a stepped approach – first the Euro-, then an Amer-, and then, possibly, an Asia-dollar. Why bother?

The U.S. dollar, despite the U.S.’s official abandonment of the gold standard, is already being used as the world-standard currency. Every other currency in the world relates to it. Big money deals, trades and projects are quoted in U.S. dollars. The price of gold is quoted in U.S. dollars.

Virtually all nations are on a decimal currency system already. Many countries already call their primary currency unit a “dollar”.

It is sad, but likely, that the isolationism of some U.S. legislators will make the United States one of the last nations to adopt the gold dollar. No problem – pegging the gold dollar to the world market price of gold means a gold dollar would buy the same amount of gold as a U.S. dollar. It’s not the same as pegging to the U.S. dollar – they’d just be equivalent. Thus, any nation, at any time, could convert its currency, wages and prices to gold dollar standards without fussing, or being fussed by, the U.S.A.

Canada has long been a leader in the forward march toward de-babelized world standards. She could lead the way toward a significantly more fiscally healthy world by introducing the gold dollar system.”

C) Convert The Debt From Car Loan To Mortgage Terms

By Fiscal Year 2000, it is likely that the combined budgets of all Canadian governments will be balanced. (The national government’s modest surpluses in F’ 98 and F’ 99 were more than offset by the deficits in provinces like B.C., Ontario and Quebec.)

By that time, in round numbers, the combined total direct debt of the nation will be about $900 Billion. At the risk of redundancy – this debt was incurred by the authorities in Canada’s governments but is owed by, and will have to be paid back by, the Canadian people.

National $576.0B

Provinces $282.0B

Municipalities $42.0B

COMBINED TOTAL DIRECT DEBT $900.0B
(That’s $900,000,000,000!)

It is never appropriate to talk about government debt as a percentage of GNP. Governments do not produce, and certainly don’t “own”, the GNP. The GNP is the total earnings of the people of Canada who’ve worked to produce products and services that people want to buy. Governments have no right to claim the GNP as security for their borrowing and debt, and lenders don’t let them.

Governments, like persons and companies, can only base their creditworthiness on past, present and future earnings. For governments, legitimate earnings are the takeout revenues of taxes and fees for service. Bankers look at debt to earnings ratios and try to judge the likelihood of not only earning interest on their loans but of also getting their money back. How able is the borrower to carry the loan with current and anticipated earnings and how certain are anticipated earnings? The only acceptable measure of fiscal fitness is the debt to earnings ratio, and Canada came perilously close to the classic 3:1 limit in the crazy years.

The debt does not include the debts of provincial Crown Corporations such as Ontario and Quebec Hydro, nor does it include the future obligations of any government’s pension plans, E.I., W.C., hospital plans, etc. Such debts and obligations need to be managed outside the direct debt. The national portion of the debt does include approximately $50 Billion owed by some 40 Boards, Commissions and Crown Corporations. This amount can be eliminated by privatization, shutdown or better management of the operations. Therefore, the amount of direct debt to be dealt with is about $850 Billion.

Three-quarters of Canada’s direct debt is held by Canadian individuals, banks, insurance companies, other financial institutions, pension funds, mutual funds, governments and the Bank of Canada. One quarter is held by foreign individuals and institutions. Therefore, it’s mainly a Canadian situation – made in Canada, to be solved by Canadians.

In 1994, the average age of the direct debt was 4.3 years. It’s probably close to the same today. That’s short-term car loan paper! While the instruments vary from 30-year bonds to 30-day Treasury Bills, the average age means that an amount equal to the total current direct debt has to be completely refinanced every less-than-five years. Talk about being vulnerable, particularly in high-interest periods.

The concept is to pay off all the bonds, bills and other direct debt instruments of the national, provincial and municipal governments with $850 Billion from the sale of a single new debt instrument – Canadian National mortgages. Payments on the CN mortgages would obviously include a principal paydown amount, as well as interest.

A 30-year amortization, fixed mortgage, at 8%, would cost $74 Billion per year – about the same as just the interest cost of all the long and short term, old and recent debt instruments that have been issued by all Canadian governments.

The objective is to eliminate the debt in a soundly planned, irreversibly guaranteed manner, in a specific time period – 30 years. With any luck, a lump-sum principal repayment provision could result in achieving debt-elimination in fewer than 30 years.

The market should respond favourably to such a creative and positive commitment to rebuilding Canada’s fiscal health. Some long-term bond holders might convert to CN mortgages, although bond lenders and mortgage lenders tend to have different criteria. It doesn’t matter.

The concept is to refinance and eliminate Canada’s current direct debt by paying it off with the proceeds from the sale of self-liquidating Canadian National mortgages.

If staging is required it would be sensible to start buying up the older, higher-interest paper first.

Eliminating the debt with CN mortgages is a simple concept that Canadians can easily understand and support. It stands in sharp contrast to some “virtual” notions that carrying an immensely expensive 900 Billion dollar anchor around forever is no problem as long as its percentage (of GNP) declines, or, that picking away at the debt with leftovers is sound.

Canadians understand mortgage debt. In the early years it can be a tough nut, but, as the years pass, it takes up a smaller and smaller part of a household’s revenue. And each monthly payment is knocking off some principal, so the goal is reached in equal monthly steps.

Short-term T-Bills would probably be required for a period until surpluses have built up sufficient current account reserves to carry variable cash requirements. In time, current account surpluses could accumulate to a size capable of covering not only cash flow needs but also the exceptional short-term needs of inevitable lean years.

While it would clearly be most effective to implement this debt elimination concept in concert with the other renovations discussed in these essays, it could be a stand-alone project. The national government could buy up all the provincial and municipal paper as well as its own. It could handle the $74 Billion annual cost by reducing transfers to the provinces by an amount equal to the annual interest the provinces and municipalities had been paying. However, it would be better if the CN mortgage concept was a part of a totally integrated and coherent fiscal, monetary and taxation rebuilding program.

Canada’s leaders need to shift to a psychology of surpluses so that all can embrace the national objective of debt-free prosperity. Canada could become an investor nation with ample contingency reserves and surpluses to finance continually improving public services. She could even make money by lending to less sensible countries. Now that’s something to plan for!

Extracts from Essay 5, completed December 1999, in “Personalism v. Socialism”