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THE

POWER

OF

THE

DEBT

EXPONENTIAL TO LIMIT HUMAN PROGRESS AND GLOBAL PROSPERITY:

AN ENGINEERING ANALYSIS OP THE U.S. MONETARY SYSTEM CHUCK McCOY P E MEMBER IEEE

ABSTRACT In this interdependent world, our continued and standard of existence on space ship earth involves the factors of technology, communication and human charity. Hidden within the interstices of these factors is the function of money. Money affects the quality of technology, the beauty of communication and the degree of charity. We in science and engineering have studied many complex aspects of our world but have applied very little of our mental resources to the study of money. How many of those who saw the movie Star Trek IV (about the whales) caught Captain they were still using Kirk's remark about money in the 20th century

..... ....

The subject of money must be confronted and conquered if we are to surge ahead into a better future. The information in this paper, concerning the present day Money System, will show inherent flaws which turn money into a deceptive resource, preventing full, wise use of our real resources. More specifically, this paper is an engineering report of the key findings, subsequent analysis and fundamental conclusions of on-going research of the U . S . Monetary System. This research and analysis is complete enough to show basic system workings and major flaws, provable through indisputable mathematical facts that govern the U.S. Monetary System. As we know, money is important and we should all have a fundamental understanding of it because it is key to our freedom and development. This subject is not out of place in an engineering and scientific group and as trained objective thinkers we actually have an important contribution to make. The information presented is not conjecture, not political, not distorted, not subjective, not theory. Rather, this information is accurate, factual, objective and mathematically correct. The monetary system is not coupled to emotional and irrational- behavior such- as is found in other of economics such as the stock market. Rather, as the model presented here shows, the money system follows definable mathematical relationships.

The

essence

of

the

problem

is as simple as:

3-

ALWAYS more

$

is

Owed

back

created

'

4 . The U.S. Securities (Government debt) held by

the FED provide the money base whereby banks and S L L ' S can create between 3 to 8 times more M1 $ . The banks and ShL's incur no debt in this process. 5.

The majority of the bank created money is loaned into circulation and 3.(above) is true here also.

6. The process in 2 . and 5.(above) are exponential generating functions, whereby -grows exponentially. This is true because more $ must be borrowed to pay the previous interest & D - I N F I N I W (just to keep the money supply constant).

That a complete model of the monetary system can be constructed is a self-evident fact because the system exists and flows are established by laws and convention. The total number of flow loops is comprehensible and the analysis can be considered almost trivial compared to complex physical systems such as a large industrial process plant, jet fighter flight dynamics or a moon landing project. With this model of the money system it is unequivocally demonstrated that u e uresent svstem has a built-in. exoonentiallv increasinq Bebt f u n w o n which will inexorably lead to hyperinflation and b&ruDtcv of the Unite& States and West This is the BAD NEWS!

ern.

The JOYFUL. GOOD NEWS is that once an accurate d e l of the monev svstem has been achieved. K c h as the one ~-ted in this m u e r , then Gorsections can be made. ~ ist-immediate r fixes can be a ~ ~edl i to the ex istins system. Second, 9 new system can be confisured to obta in a continuouslv sQble. effic ient, servins rather than enslavincr monetary SYS-.

During this conference many well thought-out and well intentioned treatise are being presented. In a l l likelihood it should be possible to conclude that the majority share one common problem. This would be the inability to justify the application of funds (under the present money system) to carry out sensible courses of action, such as: educational initiatives, technical insights, artistic inspirations and philisophical directives.

1. The FED (an independent, non-Government

corporation) creates money simply by issuing checks against no funds. The FED incurs no debt in this process. 2.

FED checks are used to purchase interest bearing U.S. Securities (Government debt), mostly through Open Market Operations rather than directly from the U . S .

89CH2931-4/90/OOO0/0157$01.000 1990 IEEE

157

It is the sincere intent of this paper to show that it is possible to transform the liability of -LIONS OF DOLLARS of U.S. debt into an ASSET, Thus trillions of dollars would be available to re-think and re-industrialize the productive capacity of man guided by people of good-will such as represented by the participants of this conference.


I. I "

which is truly good for people, high employment and busy factories, is overlayed with unfavorable, negative connotation. This sort of dilemma is what happens when monetary and socio-economic systems are blurred together.

We are living in a time when many of the systems that man has developed to perform various functions are coming under close scrutiny; for example: waste disposal, transportation and energy production. We know many, if not all of these man-made systems are significantly flawed in that there is a net unfavorable impact on the essentially closed, natural system called planet earth. This impact can be translated into a severely stressed physical system and a net decline in the standard of living for the human and non-human population. It is not by coincidence that the financial system is also under severe stress manifested by huge, unpayable debt.

The truth is that there are numerous possible monetary and socio-economic systems coupled together by a money type as shown in Fig 1. Also, when boiled down to the basic forms, there are two types of money -credit and debt issues. THE -S

CATEGORIES OF A NATIONAL STRUCTURE

J

I

Happenings -such a's this conference- are part of the scrutinizing and problem solving process. One purpose of this paper is to show that, in our scrutinizing process, we must not be diverted from examining and re-configuring the way money is created, disseminated and disposed of -THE MONEY SYSTEM. Availability of sound money is pivotal in allocating the resources required to resolve the issues that stand in the way of true pollution free progress and prosperity.

ISSUING

AUTHORITY *Government Treasury

*Credit Money

*Free

Enterprise

*Capitalism

*Central BankGovernment Control

*Debt Money

*Soclallsm *Monarchism

*Central BankBanklng Control

Much of the information in this paper has been developed, thoroughly referenced and presented previously, see Ref 1. In addition, included here are more recent applicable findings.

*01igarch ism

*Commun Ism *No Central Bank

*Facism

*Un-Regulated Banklng BANK I N G SVBSYSTEn Money is simply a unit of exchange (created by some authority, government or private) that represents real goods and services. For modeling purposes, money and money flow can be likened to the flow of electrons or fluid flow.

*Fractional Reserve "100%

Reserve FIGURE

There are two aspects to the movement of money throughout a Nation. One aspect is the creation and control of money, which is the monetary system. The other aspect is how efficiently this money is used to benefit the people, this is the realm of socio-economics. Together the combine into the expression of the vigor, quality and purpose of a Nation.

1

When a Government issues money directly. without borrowing, this is called &edit ,on;;. When a government obtains money by borrowing and issuing a debt instrument as collateral, this is called debt money. The money in the United States is debt money since all money is created as a result of borrowing.

There is a definite distiction between these two aspects of money flow. In the monetary system all the elements of money creation and money extinguishment, which are the money flow loops, can be defined and mathematically analyzed. Whereas in the socio-economic realm there are, but not necessarily inevitable, many irrational aspects as well a s multi-variate relationships. These elements can be analyzed separately from the money system. To elaborate a little on the socio-economic realm, the following dichotomous information is off ered. During this slice of socio-economic time, "analysts" indicate that market forces governing the stock market are such that higher employment and increased plant utilization are viewed as negative indicators and the stock market would be expected to go down. There are many convoluted "market force" type reasons that analysts use in a vain attempt to explain away the irrationality of this analysis. In the sometimes strange realm of socio-economics, that

158

The model of the U.S. Monetary System, which is Central Banking - Banking Control, with Fractional Reserve Banking sub-type and Debt Money, will now be presented.


MONETARY SYSTEM MODEL DETAILS

111.

-

The existing monetary system following basic elements:

Flow Chart 1 shows the underlying process with a central banking system where the central bank is a separate entity rather than part of a country's treasury. The U.S. Treasury borrows money and promises to pay more in return. This clearly results in an exponentially growing debt just to keep M1 constant. This underlying function is becoming un-mistakably evident as shown in Fig 3 , which is a plot of the actual Fed Reserve data.

consists of,the

7 - - BANKING DOHAG- -7 LON&

C&iT%N

- - - -

1

For Flow Chart 1 a value of 50% interest was used to show the function in just a few iterations. This actually is not such an exaggeration since the discount rate of the Brazil central bank is 4 9 % . No wonder Brazil has such high inflation.

I I

I

BANKS/

Ml

SLL'S

TREAS.

I

I

L

The Fed is the central bank for the banks. The U.S. debt to the Fed or whoever holds U.S. Securities or Fed Reserve Notes is a real obligation of the U.S.

GNP

_ _ _ _ _ _ _ _ _ FIGURE

We are led to believe that Fed created money is U.S. money. How can this be i f the U.S. owes a debt obligation on this money?

_1

2

From the science of control/system analysis techniques we know that when constructing any model it is best to break the overall process down into smaller sections. These sections are then analyzed and put together to obtain a well understood and accurate model. The U.S. Treasury and Federal Reserve part of the model will be developed first.

b.

The owners of what passes for U.S. money is the Fed and the banking system since they create it at no cost. The banking industry is the only example where the basic raw commodity for the industry is free. SOME MORE FACTS *The Fed was established by an act of Congress in 1913. By s o doing, Congress abdicated its authority under Article 1 Section 8 , Clause 5 of the U.S. Constitution to coin money and regulate the value thereof.

THE U.S. TREASURY. FED R E S R VE MODEL

FACTS (The following can be found in Ref. 2 . )

*

*The Fed creates money. *This Fed created money is called high powered money.(This will be explained later.) *The U . S . Treasury borrows this money either directly or from government bond dealers (private agencies licensed by the Fed to deal in U.S. securities), and uses an interest bearing security as collateral.

*There is much debate as to whether the Fed is a U.S. agency or a private authority. The fact is the U.S. is in debt and the Fed is not. This is the & issue.

So this is major flaw #1. This mathematical fact is not treated in the official banking literature. It appears that all official thinking is open loop. Once an accurate model is constructed to show the actual closed loop monetary flow then the inherent exponential flaw is modeled.

*Most money used to carry on the commerce of the Nation (Ml), is in the form of checking account balances with about 258 of the money in circulation as currency. *The Government does not print U.S. money; rather, the Fed orders the Treasury to print Fed Reserve notes for delivery to the banking system as needed. The common conception that the Government prints money for its own u s e is not true. However; the Fed Reserve act does permit the U . S . Treasury to retain the power to issue coins, which are debt free money. This is almost a non-issue in that only 38 of M1 is in coin. This does prove the point that a government can issue it's own debt free money. *The Fed prof it.

Just as electrons flow from a generator, money flows from a source. The electrons do not lose their value in flowing through a circuit from higher to lower potential. Once their energy is spent they are available to be raised up to higher potential for another trip around the circuit. More electrons do not have to be borrowed.

has no debt but rather, operates at a

When money returns to the source the value is diminished in a proportional way such that a percentage of its value is lost to interest payments. In order to make up for this loss more money must be borrowed. Whenever the money created is less than the money-owed-back (MC < MOB), then an exponential debt function results.

(The following can be found in Ref 3) *The

U.S.

Thomas Edison is credited with stating: "It makes no sense that the U.S. Treasury can issue interest bearing securities in exchange for bank money, yet the U.S. Treasury cannot issue its own money directly, without interest o bl i gat i on. "

has an exponentially increasing debt.

*If the U.S. printed its own money (instead of resorting to borrowing) and spent it into circulation there would be no U . S . debt1

I59


FLOW CHART 1 . -ON

I

U.S. TREASURY

cI

OF BASIC D (COMMENT NUMBERS ARE KEYED TO FLOW CHART)

I 7

I

MONEY CREATING POWER I

I I I

I

1100

TOTAL DEBT

1,

UN MONETIZED

DEBT

1

ILOAN 11 ESTABLISHES INCOME

I

1

L

I

1

12-8 A

I

500

I

300

I

MONETIZED

I

1

2

I

CREATE Ml

4

5

6

7

8

LOAN NUMBER

1

TO HAKE-UP FOR INTEREST DRAIN (TO KEEP M l ) (CONSTANT

3

2 3 4 5 6

I 8

50

100

25 37.50 46.25 69.38 104.06 156.10 234.15

50 15 92.50 138.15 208.13 312.19 468.29

50

100 150 225 317.50 456.25 664.38 916.51 1444.86

15 92.50 138.75 208.13 312.19 468.29 702.44

THE FED USES MONEY CREATING POWER TO PURCHASE U.S. SECURITY, LOAN 11.

@

THE INTEREST PAYMENT (I) REMOVES HONEY FROM MI, CANCELLING THE APPROPRIATE LEDGER BALANCE.

THIS INITIAL LOAN IS AVAILABLE TO CARRY OUT

@

THE U.S. NOW HAS LESS THAN ENOUGH MONEY TO PAY PRINCIPLE (P) AND THEREFORE, LESS MONEY TO RUN THE COUNTRY. ACTUALLY, AT THIS STAGE THE U.S. IS (TECHNICALLY) BANKRUPT.

@

THE FED ALLOWS THE PRINCIPLE ($100) TO BE "ROLLED-OVER" AND MAKES A NEW LOAN TO THE U.S. TO MAKE UP FOR THE INTEREST DRAIN.

@

INCOME (FROM TAXES AND NEW LOAN Y2-8) AVAILABLE FOR EXPENDITURE. FOR THIS EXAMPLE THIS WILL BE KEPT CONSTANT AT $ 1 0 0 .

THE DUTIES OF GOVERNMENT AND BECOMES H i .

LOANED (DEBT) MONEY SPENT INTO THE ECONOMY THROUGH THE BANKING SYSTEM. IN ORDER TO PAY DEBT AND HAVE INCOME FOR EXPENSES, ASSUME THE U.S. TAXES THE ENTIRE M1 MONEY SUPPLY OUT OF CIRCULATION.

THE U.S. MAKES INTEREST PAYMENT ON LOAN. (FOR THIS EXAMPLE 50% INTEREST FOR 1 YEAR PERIOD)

W J O R CHARACTERISTICS OF THIS D E B T E Y SYSTEti MONEY IS CREATED ONLY AS

A

LOAN.

MORE MONEY IS OWED BACK (MOB) THAN MONEY CREATED (MC).

MC < MOB

WHEN PRINCIPLE AND/OR INTEREST IS PAID BACK, MONEY IS DRAINED FROM THE SYSTEM. MONEY WILL NOT RE-ENTER THE SYSTEM UNLESS IT IS BORROWED. THIS SYSTEM HAS A BUILT-IN, EXPONENTIALLY INCREASING DEBT FUNCTION BECAUSE MORE MONEY MUST BE CONTINUALLY BORROWED JUST TO KEEP THE MONEY SUPPLY CONSTANT. INFLATION (INDUCED BY LOSS OF SPENDING POWER) IS BUILT INTO THE CURRENCY. THE MONEY CREATING AUTHORITY (THE FED) INCURS NO DEBT. THE U.S.,OR ANY OTHER COUNTRY WITH SUCH A SYSTEM, INCURS AN EXPONENTIALLY INCREASING DEBT.

160


E.

However, if its open market operations are to be reasonably smooth, it has to deal in an asset which is (a) available in extremely large quantities, (b) homogeneous, and (cl which has an active secondary or resale market. Government bonds are about the only financial asset that fills this bill. Thus they have been singled out for this important role. However, if the government should ever do anything a s "unfortunate" as paying off the national debt, changes would certainly have to be made s o that some other asset could take the place of government bonds in the Fed's portfolio."

FED RESERVE/BANKS/Ml

This part of the monetary reveal flaws # 2 and #3.

system model will

FACTS *When the banks receive the U.S. spent debt money that is created when the Fed buys U.S. securities through the open market operations, they are credited with an increase in reserves. "Through a process called fractional reserve deposit expansion, the banks can create into Ml up to 8 times the amount created by the Fed when the U . S . securities were purchased. This is why Fed created money is called high powered money. Actually, since the public holds about 2 5 % of M1 in cash, the actual multiplier is 3 times. If we go to a cashless society then the 8 times multiplier would apply, with a 12% reserve requirement for M1.

MORE FACTS *Flaw X2- The banks create 3-8 times more money into M 1 than created by the Fed, and the U.S. doesn't even get the privilege of spending this money first. *Flaw Y3- this money ,once again, is loaned into circulation s o debt exceeds the amount of money created. *Banks do not have to loan out their excess reserves. Banks can write their own debt free checks to make investments or pay expenses. This money can be created directly into M1. This money can also be created into M 2 or M3 such as when junk bonds are purchased by banking institutions to finance leveraged buyouts. Typically, only 10% investor funds are needed, the additional money is created to complete funding for the buyout. These money creation additions to the non-M1 part of M 2 and M3 have no reserve requirements. Banks/S&L'S can create these near-money equivalents up to their capital to asset ratio limit. The attendent/resultant total near-money multiplier is approaching 14.

*The vast majority of this money is created as loans and therefore more money is owed back than money created. When the banking system talks about consumer spending increases, credit expansion, debt expansion or money supply growth, this is what they are talking about, creation of money through loans. *This is the same type of exponential generating debt function encountered in Flow Chart 1. *The banks incur no debt under the basic money creating procedure. *The public, in total, incurs an exponentially increasing debt. *This system is a result of goldsmiths/banks realizing that they did not have to hold gold and silver equal to 100% of the metal in their vaults. This transformed goldsmiths/banks from mere custodians holding specie reserves equal to 100% of the deposit and bank-note liabilities into lenders who held specie equal to only a fraction of their liabilities. Flow Chart 2 shows the process of money creation and expansion. The banks can loan (create) money up to their required reserves. The original checking account deposit is available to the depositor and is counted in M1. The newly created loaned money is deposited in a checking account and is available for circulation and is also counted in M1. If both accounts were drawn out in cash the bank can request Fed reserve notes to cover the withdrawl. A value of 50% reserve requirement and 50% interest was used in Flow Chart 2 to show the expansion and debt accumulation in a few iterations. Some socio-economists do present some of the entrapping implications with the present money system, such as this excerpt from Ref. 4 pages 456 h 457. "One important implication of the Fed's reliance on open market operations, rather than making loans directly to banks to expand bank reserves, is that money is created largely through the monetization of public, not private, debt. Therefore the public debt plays an important role as the ultimate basis, or backing, of our money supply1 The reason is as follows: The Fed, if given a completely free hand, could create bank reserves by monetizing anything from soybeans to common stock.

161

Because of the Garn-St. Germain Act of 1982, S&L's now can also create money into M1, M2, M3, etc. This is why the SLL's were able to make such huge investments that unfortunately have turned sour. DEBT $ TRILLIONS l2 T

GRAPH OF DEBT AND THE DEET MONEY SUPPLY IN THE UNITED STATES 9

t

I

r

/ / I '

I

"I L/

I

TOTAL DEBT

:'[1

73

.4 ZED)

75

77

19

81

83

YEAR

FIGURE

3

85

87

89


FLOW CHART 2 . DEBT MONEY CREATTQN BY THE BANKSISCL'S BY USE VE DEPOSIT EXPANSION -- 7-1 T- - - B A N K S / S ~ L * S

MT

I

I , FROU FLOW CHART 1 I I

I

-

DEPOSITS

1

I

EXCESS I RESERVES ACCOUNTS

REQUIRED RESERVES ACCOUNTS

I

I

I

I

l -

I

I

TOTAL DEMAND DEPOSITS

I

I I

I

BE:

I I

'

TO I FLOW CHART 1

FED CREATED (HIGH POWERED)

I I TOTAL REQUIRED RESERVES

1

L--c.

$100

I

U

PRINCIPLE t INTEREST

I&I I

COMPONENTS OF Ml

TOTAL EXCESS RESERVES

$loo

--

-

_LOAN -

1

I

I

ETC.

I

I

I

I

J

---L---

$200

I 1

TOTAL DEBT MONEY CREATED (HC)

$200

(P)

+loo

(1)

TOTAL MONEY OWED BACK (AFTER 1 INTEREST PERIOD)

' $300 (DEBT)

(MOB)

U

THR C O E L E T E DEBT-OM

The final form of the present money system model is presented in Flow Chart 3 . This chart includes further flow paths that might seem to complicate the analysis. These paths can all be modeled in a rather simple computer program and various scenarios and actual data can be analyzed. Further flow loops can be added but this model will suffice to show the overall workings of the system. The flow model provides an excellent way to discuss and analyze the monetary system. Ravi Batra in Ref. 5, page 80 provides some insight but falls short of defining all the major inflows and out flows for Ml. Non-U.S. money flows can be accounted for and included in a global model. Such an expanded model is being developed and is the subject for a future paper. Once again, the actual analysis is not very difficult. What is difficult is sorting out what is exactly meant by such things as "Eurodollars" and the implications of financial constructs such as currency values/exchange rates. The present rhetoric implying that the U.S. is fatalistically dependent on foreign investors to purchase rolled-over/refunded U.S. debt is somewhat un-informed. As lender of last resort, the FED could purchase the non-bank held portion of this flawed debt without an increase in bank reserves. The foreign held money could be used to purchase U.S. goods and services, resulting in a real increase in the standard of living for those on both sides of the transaction.

*Money is drained from M 1 by principle plus interest payments. This money disappears from circulation and will not re-appear unless the banks spend it or re-loan (re-create) it into circulation. *When the public reduces its demand for loans the banks can keep Ml near target by increasing expenditures. *As pointed out previously, if the U.S. paid off its debt, money would disappear from circulation because there would be no more U . S . debt to monetize and expand. *If the public paid off their debt, then money would disappear from circulation because no new loans would be made (assuming the banks do not spend into circulation all their free reserves). *Actually, since total debt is around $11 trillion and the money supply (M1) and near money equivalents (L-Ml) are at $ 4 . 5 trillion we are short $ 6 . 5 trillion from being able to pay off the debt. See Fig 3 . *Savings, which are supposed to be a factor to help improve our debt problem, can only come out of Hl, M 2 and other near money equivalents. Therefore, the money saved would necessarily have been created as some type of loan. Savings are always loaned out again. Therefore, savings contribute to the debt exponential in the present money system. The reason why savings are helpful in Japan is that the Central Bank discount rate is only 3.25%. Our debt exponential will blow up long before Japan's will.

162


FLOW CHART

3.

THE C OMPLETE DEBT MONEY SYSTEM MODEL - ~- _ _

~~~

__-

~-

BANKING DOMAIN

I

TAXES

NON-U.S. PURCHASES

I

GOVERNMENT BOND HOLDERS

MCF t MCB

/t\

<

HOB TAXES

FLOW CHART

p

4.

p

EXPENDITURES TO CARRY ON THE D U T I E S O F NATIONAL GOVERNMENT

I

_____

~~

LOANS FOR HOMES AND I N D I V I D U A L FARMS

PI

L

SPENDABLE INCOME PART OF GNP LOOP

L

FROM THE BANKS

PtI

FROM STATE/LOCAL

GOVERNMENTS

HOME AND FARM LOANS NOTE N O NEED FOR :

* *

DRAINS

I

P(0NLY) PtI

SEPARATE FEDERAL RESERVE FEDERAL PERSONAL INCOME TAX

163

*

*

COMPOUND I N T E R E S T GOVERNMENT DEBT


The last aspect of this portion of the model involves M1 and the Gross National Product (GNP). The M1 money supply is the chief economic lifeblood of the U.S. This is the money used to carry on the commerce of the Nation. When M1 is expanded (by making loans), even though this is inflationary, there is a definite correlation to an increase in GNP (Fig. 4 , also, Ref 6 . page 309). The GNP represents money paid to business and by business for exchange of goods and services. Money is not created in this 1 0 0 ~ . Rather, only the need for money (loans) and wealth transfer occur in this loop. Since M1 as of 1989 was about $780 Billion and GNP was about $ 4 4 0 0 Billion, there is apparently not enough money to account for GNP. This circumstance was recognized by and puzzled economists years ago and then they realized that H1 must be continuously re-circulated. They described this phenomenon as velocity. For 1989 velocity would have been 5.6.

GRAPH OF CORPORATE INTEREST EXPENSE AS A PERCENT OF PRE-TAX DOLLARS v1

4il

75

il

n

2r

/

50

W 04

a

5 25 E

0

60

IV.

cl 10 LL

“ 8

a

8*

a

61 0

2

90

The majority of popular economic opinion is that there are no quick fixes and no way to assure a stable economy. This is not true. A solution is possible and could be imp’lemented by an act of Congress o r even a simple policy initiative by the U.S. Treasury. A long term restructuring could then be made.

>

w

80 YEAR FIGURE 5 SOME SOLUTIONS 70

2

$ 0 4Q

I! 58

: : 62

66

q ; : 70

: : 74

: : L I-2

I 78

82

86

YEAR FIGURE

4

One final note. The infoImation just reviewed provides a mathematically based answer (when viewed from the context of the model) as to why the Fed is watching the economy for signs of inflation. With this discordant money system, and where we are on the debt exponential, the money growth/inflation transfer function will exhibit high sensitivity because the increasing proportion of debt service cost (reduced purchasing power/inflation) of every dollar now in or brought into circulation. Incidentally, it won‘t be long before the M1 money supply will no longer be adequate for the system to continue to work. This is because the money supply is quickly becoming a smaller proportion of the total debt accumulation (see Fig 3 ) , and an increasing percentage of M1 is being drained to pay principle (P) plus interest (I). The increased debt burden is beginning to heavily impact industry. The percentage of pre-tax dollars going to pay debt service increased to 5 0 % in 1988, see Fig. 5 .

164

Flow Chart 4 shows the basic concept of a Constitutional, debt free, recession proof, harmonious money system. Note that there is no need for personal income tax to balance Treasury out flows since principle plus interest payments take the place of income tax flows. Money would be cteated and re-cycled for expenditures (MCE) and to make loans (MCL). Banks would be involved with lending to industry and for consumer purchases. Money would be removed from circulation by principle plus interest payments. The need for national personal income tax is eliminated. This system would be stable and the relationship between created money and loans would be regulated such that MCEtMCL > MOB. One short term solution would be: If the U . S . taxed the banks a portion of the money they created in the amount required to pay interest on the U.S. debt and some extra, then debt free money would enter circulation. The system would begin to stabilize. The exact amount can be determined to provide sufficient correction while a scientifically engineered system could be put into effect. Note: the banks would get the money required to pay the tax from free reserves added to their accounts by the Fed. The reserve requirement could be gradually increased to 100% to eliminate monetary expansion by the banks ( Ref. 2 , page 92 and Ref. 7, page 369). Another quick solution that is just receiving publicity would be: In order for State and local municipalities to avoid paying enormous sums of interest for public works and other facilities, the U.S. Treasury would issue money from a checking account registered with the FED. These checks would be drawn upon the money creating authority of the Government and the money would be loaned to qualifying tax bodies at no interest. Repayment to the U.S.Treasury would be scheduled to actually reduce the present cash flow of the local government by loaning enough additional funds to retire an amount of existing debt, see Ref. 8 .


Examine the models and consider the system characteristics and you can come up with some workable solutions also. There are many ways to un-ravel this system all we need to do is use our engineerinq/scientific creativity. V.

CHANGING NATIONAL DEBT LIAB ILITY INTO AN ASSET

The exponentially increasing debt function will require an accelerating increase in money velocity. It will become increasingly difficult for businesses and people to keep funds for very long. Bankruptcies and bank failures will accelerate which will disrupt the GNP flow.

The present U.S.monetary system has 3 major flaws as identified in the models presented in this paper. These flaws are: 1. The Fed created money loop (high powered money) results in a debt obligation of the U.S. Treasury. Always more money is owed back than money created. This results in an exponentially growing debt function that is mathematically provable and is supported by the data. 2 . The banking system creates about 3 times more

M1 money than that created by the Fed. In the non-M1 part of the total money supply the multiplication factor is much greater since there is little or no reserve requirement for these aggregates. This money ultimately is a debt of the U.S., yet the U . S . does not even get a chance to spend this money into circulation first.

If the U.S. were to take over all bank owned debt obligations, since they were acquired by the banks creating money against the U.S. anyway, then Flow Chart 4 would essentially be put into effect. The basic proposed configuration is shown in Fig. 6. The U.S. Treasury could issue and spend into circulation and loan to banks, trillions of dollars without fear of monetary inflation. This is because the debts would now be repayable with this addition of debt free money. This additional money would be used for any number o f desperately needed infrastructure projects and provide good jobs for people in a process of environmentally sound new and re-industrialization in the U.S. and associate countries.

s u w

VI.

3. In the banking system money creation loop, money is created for the most part as loans. This is how M1 is replenished and increased. Loans require more money to be paid back than money created, once again creating an exponential function that is mathematically provable and is supported by the data, see FIG'S 3 & 5.

4.

This can all be avoided by the U . S . Treasury spending and loaning zero debt oblisation U.S. Treasury created money. This is not an unfamiliar concept to socio-economists.

These additional expenditures would in due course be extinguished out of circulation by payment back to the U.S. Treasury without the need for taxes. Actually, income taxes could be eliminated permanently since principle and interest payments would take money out of circulation. (In other words, monetize the debt and spend the money into circulation s o that people and businesses can earn the money needed to pay off their debt which would now be owed to the U.S. Treasury). This should be done first in Charleston SC and the San Francisco Bay area to pay for the enormous expense of bringing life back to normal for those affected by the recent natural disasters.

REFERENCES 1. ?'AN ENGINEERING ANALYSIS AND MODEL OF THE UNITED STATES MONETARY SYSTEM" Presented at Southern California Meter Association meeting, June 1989. C.E, McCoy P E

Just think of the great works projects that could be implemented, such as a national water distribution system, national transportation system, clean energy, and citizen need programs such as health and education. This would be accomplished without the progress limiting debt exponential and without inflation caused by the collapse of purchasing power due to debt service costs. PROPOSED U . S . MONETARY SYSTEM : NON-EXPONENTIAL CHARACTERISTICS

2 . Money and Banking

Duilio

Schaum Outline Book McGraw Hill N.Y.

1987

3 . The Truth In Modey Book Thoren PO Box 3 0 Chagrin Falls, OH 4 4 0 2 2

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I

Warner

1989 4 . Economics

Addison Wesley Reading, MA

Stigum

&

Stigum

1968

5 . The Great Depression Of 1990 HONEY CREATION

&

Dell

N.Y.

Batra

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INDUSTRY

6. Economics

Gwartney & Stroup Harcourt Brace Javanovich N.Y. 1987

7. Applied Economics Bye 6 Hewett Appleton-Century-Crofts New York 1960 8. Sovereignty FIGURE

1154 West Logan Street Freeport, IL 61032

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Ken Bohnsack


US Monetary System