Monday, January 3, 2011

The National Monetary Insanity Act

On December 17th, Congressman Dennis Kucinich introduced H.R. 6550: National Emergency Employment Defense Act of 2010 on the floor of the House.

The bill is gaining supporters from many pockets of the internet. What this indicates is that there is still a lot that needs to be done in terms of educating the public about the basics of economics. This bill is quite simply loony,

Passage of the bill would create even more problems and chaos for the economy than already exist, at an exponential rate.

The bill calls for among other things:
To abolish the creation of money, or purchasing power, by private persons through lending against deposits, by means of fractional reserve banking, or by any other means.

Now, there is nothing wrong with stopping the issuance of loans where a bank doesn't have the funds on deposit to make the loans. i.e. fractional reserve banking. That's simply preventing fraud, but to call for the limitation of loans where on all deposits is simply mad. An economy grows because people save by depositing  money in banking institutions, where the money is lent out. To the degree the money is loaned to the business sector, capital is available for further production. There is simply nothing wrong with this at all. [NOTE: To further clarify what type of deposits a bank should be allowed to make loans against, it should only be against deposits where depositors leave their money with understood time restrictions, such as certificates of deposits, as opposed to, say, demand deposits.]

The bill also calls for the loans function to be turned over to the government:
To enable the Federal Government to invest or lend new money into circulation as authorized by Congress and to provide means for public investment in capital infrastructure.

This is simply central planning. Instead of money being placed in the hands of multitudes of entrepreneurs via bank loans, this bill calls for loans to be made by the government. The same government, I might add, that funneled billions upon billions in TARP funds to elite banks. Entrepreneurship will thus be replaced by a government power structure that will dole out money based, of course, on influence. Further, it appears that there is no limit set on how much money may be printed for this mad adventure.

The bill goes on:
To incorporate the Federal Reserve System into the Executive Branch under the United States Treasury, and to make other provisions for reorganization of the Federal Reserve System.
The executive branch has gained and continues to gain enormous power. The executive branch now wages wars at will, this bill would give even more power to control the entire economy. "He who has the gold" or in this case, paper money, makes the rules.  This is simply mind boggling. It is giving the exeecutive branch the power to declare  a great economic war over its own citizens.

The bill also calls for the inflationary idea of printing money to resolve any deficit problems:
In General- After the effective date, and subject to limitations established by the United States Monetary Authority under provisions of section 302, the Secretary shall originate United States Money to address any negative fund balances resulting from a shortfall in available Government receipts to fund Government appropriations authorized by Congress under law.

Even more inflationary, the bill calls for paying off the entire U.S. debt by simply printing money:
Before the effective date, the Secretary shall commence to retire all outstanding instruments of indebtedness of the United States by payment in full of the amount legally due the bearer in United States Money, as such amounts become due.

Just for good measure, the bill throws in controls on interest rates:
Limit on Rate- The annual percentage rate applicable to any loan of money may not exceed 8 percent on unpaid balances, inclusive of all charges
In addition, the bill calls for the printing of money for education, mortgages, local governments and on and on:

The Congress shall be aware that funding through this Act is available for a universal health care plan as may be enacted by Congress...

The Congress shall be aware that funding through this Act is available for Congressional enactments for resolving aspects of the mortgage crisis....

Before the end of the 180-day period beginning on the date of the enactment of this Act, the Secretary shall provide recommendations to the Congress for a program of interest-free lending of United States Money to State and local governmental entities, including school boards and emergency fire services for infrastructure improvements under their control and within their jurisdictions, based on per capita amounts and other criteria to assure equity as determined by the Monetary Authority...
And, what the hell, they are just going to print money and give it to everyone:
In General- Before the effective date, the Secretary, in cooperation with the Monetary Authority, shall make recommendations to the Congress for payment of a Citizens Dividend as a tax-free grant to all United States citizens residing in the United States in order to provide liquidity to the banking system at the commencement of this Act, before governmental infrastructure expenditures have had a chance to work into circulation...

Some supporters on the internet argue that this type proposal will not be inflationary. They argue for a sort of sterilization that will reduce Fed created money in sychronization with the issuance of new currency to retire U.S. government debt is issued. They argue they will do this by raising the reserve requirement.

But the U.S. debt stands at a near $14 trillion. The total amount of money in the system, the money supply (M2), is only, roughly, $9 trillion.
It's going to be a neat trick sterilizing $14 trillion by simply erasing $9 trillion. That's a shortfall of more than 50% and does not include the increased trillions to be printed for healthcare, mortgages, education and the Citizens Dividend!

Never mind the huge distortions caused by all this, there is also (and this is really the most insane part of a totally insane proposal) the complete wipe out of all bank loans made to all businesses--as the sterilization takes place.

Bottom line: We have an entire set of people who believe that money printing itself creates wealth. They somehow don't get that production of goods and services is the only thing that creates wealth. They want to take power away from the way Fed as it is now structured as a fractional banking system--which should be done because the Fed does print money and thus distorts the economy in favor of the banking elite. But they don't see the money printing as part of the problem, just how it is now done. For them, printing more money is going to mean, by itself, more cars,education, healthcare and homes, as starters.

It is serious, serious confusion that if adopted by Congress would result in nightmare inflation and totalitarianism that would put us directly on the road to a Zimbabwe type economy. Let us hope that there is nowhere close to a majority that support any part of this bill.


  1. I think the lunacy of this bill is best understood in the context of Kucinich's economic advisor, who last time I checked is/was Michael Hudson. Hudson has talked nostalgically from time to time how a Biblical-style Jubilee is a solution to current global debt problems. You can read about it here:

    Note the treatment of private property. Not only does it involve debt forgiveness, but rescission of all real estate transactions made within the last 50 years. In this regard, the bill doesn't go far enough!

  2. America's War on Reality continues.

    Pack your bags, hug your gold and silver and learn a foreign language because the inmates will have complete control of the asylum if this bill comes to pass.

    What sort of perverted mind creates this type of bill anyway? This is James Bond-esque type of villainy.

  3. Karl Denninger supports it; He argued with Mish on this topic few times.

    I, for one, would support anything other than status-quo.

    At the least, it will wake the people up sooner.

    Its not like we have any better model right now...its eventual path is doom.

    Do u want slow torture or something risky/quick and hasten enlightenment ???

  4. How does this guy keep getting elected? I could understand if he represented San Francisco or New York City where reality does not exist, but Ohio? Do that many loonie hippies live there?

  5. Do not worry america, for Bill Still and his magical army of greenbackers stand ready to solve all americas monetary problems with ...... tally sticks!

  6. Karl Denninger posted a ringing endorsement of this bill on 12/21/2010. He made it clear that if Ron Paul and others do not support this wacko bill, then they do not really favor sound money. You see, THIS bill would get rid of the pretense of the Fed buying treasuries, and replace that arrangement with straight-up money printing by the executive branch. Therefore, it is HONEST money. Get it?

  7. Wenzel,

    This part sounded contradictory:

    Now, there is nothing wrong with stopping the issuance of loans where a bank doesn't have the funds on deposit to make the loans. i.e. fractional reserve banking. That's simply preventing fraud, but to call for the limitation of loans where funds are on deposit is simply mad. An economy grows because people save, deposit money in banking institutions, where the money is lent out. To the degree the money is loaned to the business sector, capital is available for further production. There is simply nothing wrong with this at all.

    I don't get what the difference is between the first thing you described and the second. Maybe I am just hung up on the term "deposit."

  8. Not a fan of this bill, but some form of jubilee may be a better solution for the fraudulent subset of debt. To make things fair to those who aren't benefited by such a jubillee, I would propose returning some of the govt lands back to private use.

    To revive the economy, more productive resources need to be utilized, while eliminating wasteful activity.

  9. @ Conant

    That's what fractional reserve banking is: Making loans against non-existent deposits, that are then created by the loan itself.

    ("Deposits" which are then created by the loan itself)

  10. I'm not going to put words in Conant's comment box, but it occurred to me after reading his selected quote that if a bank backed a long term loan (e.g., mortgage) with demand deposits, it could constitute fraud because the bank would not necessarily be able to satisfy withdrawals from the demand accounts. I note Wenzel did not use the qualifier "demand", so "deposit" could refer to a term deposit (CD). If a bank took steps to match avg weighted maturities on its assets and liabilities sides, this would not constitute fraud in a free banking world. Another workaround for a bank to be able to lend long term against short term deposits would be for the depositor to agree to suspension of redemption clause in return for payment of a higher interest rate. Or, bank loans could be made callable in return for a lower interest rate paid by the borrower as compensation for the potential inconvenience of having to repay the loan early. There are probably many other free market solutions to avoid cash not being metaphorically stashed under a mattress, yet not lent out in multiples.

  11. I have to agree with Contant, although perhaps more information is required in Robert's example (ie deposit type and contractual arrangement with the depositor). However, if a bank lends money out of deposits while at the same time contracting with the depositor to have their funds available on demand, that is fractional reserve banking. As I understand it, member banks can only borrow from the Fed to increase reserves to required levels and not for the purpose of lending money.


  12. My point with regard to "deposits" was made specifically with regard to the section of the bill quoted that calls for the halt to the loaning of funds against any deposits.

    It is the bills awkward terminology that I had to deal with. My shortcut attempt calls for loans where new deposits are not created. That is now, when a depositor deposits $100 cash a multiple number of additional loans will be made. To make things simple for this example, assume a reserve requirement of 10%, $100 deposited could ultimately result in $900 in new money (or deposits).

    Of course, there are further problems making loans against demand deposits and time deposits versus CDs,that's why I put in "when people save".

    I will add a clarification to make it clear, but the point stands that there should be no problem for a banks to make loans against deposits, where the depositor clearly understands the money is not available for immediate withdrawal, and the banks don't, as a general practice, allow immediate withdrawal of those type deposits.

  13. The most important tool in the toolkit for TPTB is the US Fed. If this bill passes and BO signs it, it is only because those in control want it to be so.

    If there is one system of money manipulation worse than the current US central bank, this bill unleashes it. Therefore, if the bill passes, this should be taken as a confirmation that the takedown of the dollar is deliberate - not out of ignorance but out of desire. They are ready to speed the process along. It would mean that the replacement is ready for implementation.

  14. 402.(a)(1)(C)(i) does say "IN GENERAL- Subparagraph (B) shall not apply to any liability of depository institution to a customer for any amount in an account at the depository institution pursuant to a contract that restricts the availability of any such amount for a fixed term and does not permit amounts to be transferred in any manner for the benefit of a third party."

    I read this as preserving the right of banks to loan against things like CDs, so I don't think you're at odds with the bill on this point. This wouldn't affect your other criticisms, though.

  15. Robert is slightly wrong (or misleading) on fractional reserve banking.

    FRB doesn't allow lending from money "that's not there". It permits leading FOR A PERIOD OF TIME GREATER THAN THAT PERMITTED BY THE DEPOSITOR.

    That is what "creates" money - the lending of checking deposits. If "time" (or "term") deposits were lent out for the same period as permitted under the time deposit, then "money" wouldn't increase via bank lending.

    It's not that banks creates loans out of nothing but they mess around with maturities - getting money in via the "promise" of withdrawal at any time, and lending that out for longer periods than the depositor would ordinarily permit (if they knew what was going on).

    Checking deposits under this system of full reserve banking wouldn't be lent out at all because they are needed immediately at any time.

    Only term (or time) deposits would be lent out in this system.

    And, no, the legisation isn't crazy (at least it's not as crazy as the current system) and although I'd prefer a return to gold and free banking, this is actually a viable alternative to the current system. Karl Denninger is right - this is something even libertarians could support IF the choice is between this alternative and the current insane system.

    Why the hatred of this alternative when we all agree the present system is madness?

  16. @karmaisking

    Money is indeed printed out of thing air. There is a problem with regard to the matching of the length of assets and liabilitied, but it is far more than that. With a 10% reserve requirement $100 deposited, will lead to a total of $900 in loans.

    It's impossible to explain fractional reserve banking in a comment post. I recommend Murray Rothbard's "The Mystery of Banking".

  17. At least he's refreshingly bold about getting rid of the private Fed banks in his own fashion. The debauchery of our monetary system by the Fed for 100 years will soon end anyway perhaps, by several means. My way would involve the GNP used as a basis for M1, etc. This would eliminate most new national debt, which would only be possible during a congressionally declared crisis, not an undeclared "war" of 10 years or more. This type of fiat would honor the work ethic, which has been lost in so many ways to date, let alone the usury of the Fed printing from "thin air" type fiat...but you will never see it happen, as it's FAIR to the working classes of this country instead of the usurious classes, who pay 16% on unearned income, while we pay 38%. We must stop allowing untaxed capital flight, outsourcing of jobs and whole industries, and reward not only job creation in this country, but industrial rejuvenation, lest we become a real third world type nation. Investing in china for cheap labor is simply NOT American ! At least they now have a tax on "offshore" investment monies...and waited til the hook was in real deep before hauling in the "unwary". Sad; lost money that could have rebuilt this nation...but LABOR also must reinvent itself to today's realities; it's not WWII anymore ! Realism in all realms is a must. Gold is a nice commodity, and preferable to staight fiat as now, but a GNP based currency is HARD MONEY that keeps it's value, reflecting the true level of productivity of a country as the money supply would vary... so we ALL have a stake in our futures, not just a chosen few...and remember, even CEO's work! WORKERS OF AMERICA, UNITE, and show the world what we were, and could be made of again...with HONEST GNP money !

  18. As systemic chaos continues, expect to see more and more such crazy ideas to be out forth and hungrily lapped up by the masses. There was some idiot on TV the other day who was complaining about the fact that there is too much talk about debt and not enough talk about unemployment. What's the point of 100% employment with everybody getting million dollar paychecks if a quart of milk cost 10 billion?

    Seriously, if printing money worked - why bother with employment/unemployment? Just give everybody a printing press - surely that much "liquidity" will solve the problem!!

    And they call those of us who believe in TANSTAAFL and free markets as "loonies"....

    *shake head* You just can't make this stuff up!

  19. Apparently, I woke up this morning and somehow landed inside a page of Atlas Shrugged.

    To anyone with any kind of economics sense, or even street smarts for that matter, this proposed legislation is quite ludicrous. The effects will be more adverse than most realize. Not only because this legislations is bad, but what else it will bring in the future. The negative effects would compound, in my humble opinion.

  20. The real problem here isn't how bad this is, Congress regularly does bad things. The real problem is that Kucinich is among the best in Congress and this is what he comes up with.

  21. Lunacy on the cusp of madness, eh? Stop and think a second --- all this "money" has no objective existence outside the minds of humans. Disks of metal, printed pieces of paper, electronic entries in bookkeeping programs --- all a crazy game when one can step outside of the paradigm. Time to "reboot" the system!

  22. To stress the point of there not being enough money presently in circulation to zero out the outstanding debt, you are correct. Of course, it occurs to me that this is merely intended as a sampling bill, to get legislators accustomed to what they should be expecting after several more spates of quantitative easing for the purchasing of government debt have already been printed by Helicopter Ben. Furthermore, this may be intended to present a partial straw-man of Austrian Economics, in a dramatic exaggeration of economic policy along the lines of what they would propose, in order to sully the taste of its potential in the mouths of the majority.

  23. To abolish the creation of money, or purchasing power, by private persons.... blah blah blah...

    Seems the Feds are reminding its slaves that they'd better not get any ideas about going outside its crooked system.

  24. It's a ridiculous bill, I agree.

    However, Mr. English needs to do a lot more on the "jubilee" idea; specifically, since there is a mountain of debt that can never actually be paid, what can be done other than a jubilee of one kind or another?

    Hudson is no fool. You should read his web page.

  25. Kucinich intends to prohibit lending AGAINST deposits. Lending out deposits is what banking should be about. Lending AGAINST deposits is fifty percent fractional reserve banking right there.

    Maybe the Powers That Be need to fire you and hire someone else to infiltrate the libertarian movement and divide libertarians from progressives, because you can't even be bothered to learn simple economics terminology in order to plausibly pose as a bona fide economist.

  26. The Fed simply needs to be abolished. The Bill does that. The control of the American money supply should be in the hands of the Government and not a bunch of private bankers who have been bleeding the citizens dry for 98 years. Dennis Kucinich, Ron Paul, Alan Grayson and Bernie Saunders all oppose the Fed and the giant ponzi scheme established back in 1913 by the totally treasonous President Woodrow Wilson. All Americans have been bent over and have all been receiving a good dose of sodomy by this nefarious parasite for nearly 100 years. Time for it to stop eh wat?

  27. Eudoxia said it best. Money needs to be tied to gold and silver again and not created out of thin air like it is now. I wish Andrew Jackson was alive again. Maybe he's just reincarnated as Kucinich.

  28. Robert,

    I think you do read too much in some parts of the text of this bill.

    The purpose seems:
    1. Bringing back the Federal Reserve under control of Congress to restore the powers the Constitution gave to Congress. This is also what Ron Paul seems to support
    2. Introduce 100% reserve banking for standard savings. Which is what before 1980 the Savings & Loan banks were only allowed to do. This is the prohibition of banking fraud by killing the fractional reserve practices, which is how Austrian Economists phrase it.

    What's not in here is the decision to return to the gold standard. This desire for the gold standard is Rothbardism and probably originates from his political desires to remove the ability for states/monarchs to debase a currency by for instance reducing the gold/silver content of coins. A practice widely observed throughout the last two millenia, up till paper money took over.

    Governments and Monarchs have shown that they were able to manipulate the money supply when they issued coin. In the eve of World War I this was done by "going off gold". Someone like Ludwig von Mises was far too much a practical economist during WWI not to understand this manoeuvre. This was one of the reasons that Mises never went as far as Rothbard on advocacy of a gold standard.

    What Rothbard wants with the gold standard is effectively a desire to re-establish bartering (goods for pieces of gold, another good) as the fundament of the monetary system.

    Now we do know that in periods of hyperinflation or extreme conditions (like the famous barter economy with cigarettes as coin that rose in Prisoner of War camps in WWII) people return to bartering. The current Libertarian solution seems to be to advocate competing currencies (including gold/silver) to let people decide themselves. There is a reason to advocate that and not a straight return to the Gold Standard. Just imagine what would happen when Central Banks would restart today to buy up gold to shore up their Gold Position and restore their balance sheets via Open Market transactions (like the Bank of India did last year as well as the Chinese government in 2008). Not only would the Gold price explode when the FED announced a policy to buy gold to add to their reserves, the result would be a very unusual type of inflation.

    A true Libertarian policy negotiation with Kucinich c.s. would be that you state "you get our support, when we do allow competing currencies and gold and silver again become legal tender." That would be an act of confidence in the ultimate outcome that people would prefer to transact with specie instead of paper money created by fiat.

    It would help if you do not misread the wording and redefining it, because you start to attack a strawman and suggests you are anything but open for a serious debate about this issue.

    As I wrote above, there are genuine differences between Mises and Rothbard on the role and function of a gold standard and moving several steps towards Mises position, which this bill would accomplish seems already very helpful.

    This bill attempts to take the hand away at the money printing machine from bank(st)ers by formally restoring the powers the Constitution gave to Congress.

    You may choose: do you want bankers controlling the FED and a FED chairman on occassions appearing for Congress in hearings where he says effectively nothing, while ordering his staff to buy up Treasuries, or do you want the elected representatives of the US Congress to make the decisions.

    Which group of people with the hand at the money printing press do you mistrust most?

  29. Combining this with Ron Paul's proposal to legalize competing currencies, might be a relatively painless way of liquidating the national debt by monetizing it completely. At the same time Americans can replace the dollar with silver, or whatever, the hyperinflation of the dollar could render the current state structures meaningless.

  30. Eudoxia... I think you're merely 'choosing your rapist' by having the White House print money instead of the Fed.

  31. While the printing of money to repay America's $13 trillion national debt may seem mad, it is not half as mad as printing trillions to give to banks so they can foreclose on us and rob us blind. End the wars, punish the bankers.

  32. most comments here dont reflect the reality that the system is already dead. the usa is aready in a hyperinflationary phase and the government is already totaliarian.obama is a blackmailed wall street puppet, your dollar is breathing its last breaths.

    press the delete button on the quadrillions of digi derivatives,oust obama, nationalize te fed.

  33. Austrian economics, Mises, Jackson, healthy theory (physics etc. applied in industry) and quality practical application in all matters, and 'noble-regard' for people are gone or nearly extinct. Skipping over details ... Lack of 'preserving-traditions' have damaged culture severely and our cause is not ours and neither is sovereignty. Better to start considering the roots, the cause and effect the 'natural-rights' or better the matters that transcend. Endless war-scheming and suggestions of hostile activities have not engaged public scrutiny but rather reassured 'world-power'. Current thieving-monetary-insanity has been quite-simply-loony. May the-Truth return quickly.

  34. This is right out of "Animal Farm"---All of it would make perfect sense...if the proponents think of themselves as shepherds---it occurs to me that they do indeed see the masses of people out there as their herds. ---The fact that they ware 3 piece suits and ride around in chauffeur driven limos confuses a lot of people; but one can not remove the evolutionary effect of thousands of years herding animals---once a shepherd always a shepherd.

  35. Before you risk completely destroying your credibility with another article like this one, I suggest you READ the documents you purport to review. I’ve been meaning to take a look at HR 6550 for some time but have, I guess, been waiting for people like you to do it for me. That was clearly a mistake. Right out of the gate you come up with:
    “Now, there is nothing wrong with stopping the issuance of loans where a bank doesn't have the funds on deposit to make the loans. i.e. fractional reserve banking. That's simply preventing fraud, but to call for the limitation of loans where on all deposits is simply mad.”

    If you look at HR 6550 Sec. 402, (d),(1),(A),
    (A) any depository institution shall have a fiduciary responsibility for the money of any depositor on deposit in a transaction account which—
    (i) shall be held for the exclusive use of the account holder; and
    (ii) may not be used by a depository institution to fund loans or investments
    that would seem to be a reasonable conclusion.

    UNTIL you realize this verbiage is contained in a section titled “(d) TRANSACTION ACCOUNTS.”, in other words, checking accounts.

    How about trying this article again, AFTER you really understand HR 6550 and without all the ad hominem attacks?

  36. I think I see a trend of maturation in the comments that hopefully will continue as we try to better understand the mechanics behind the NEED Act.

    As far as it being non-economic, well it mirrors in most respects mentioned here the plan developed by six prominent economists known as the 1939 Program for Monetary Reform.

    Yeah, if you read that, all of the gold-holders will be holding on tight.

    The basic premise behind the Act is a move to a standard for our national monetary policy known, as you may guess, as the standard of stable buying power of the currency.
    That's what is needed without a gold-exchange-standard quantity to weigh.

    Again this is in the 1939 Program and the National Monetary Control Act of 1934.
    The only real restriction on lending deposits is based on the demand deposit being a deposit, and monies "deposited" in savings accounts are considered in the Act as being investments made with the bank.

    So, bankers will be lending out other peoples' investments, which is what we think they do now.
    After you get over that, it's an easy read.


  37. This is a most inaccurate and disingenuous review of the bill or it is a sophomoric reading that requires the Mr Wenzel return to English class to get the basics of sentence structure and content.

    "To abolish the creation of money, or purchasing power, by private persons through lending against deposits, by means of fractional reserve banking, or by any other means."
    The above sentence taken from the bill talks about the creation of money by whom and by what means.
    Mr Wenzel actually agrees with every bit of the content of this sentence yet goes on to attempt to discredit Kucinich by making up stuff that is not in the body of the sentnce or the body of the bill. Please, either learn to read a complex english sentence or get someone to interpret for you before you go making statements about what something says that clearly are not true.

    This kind of attack article is typical of entities that are not keen on seeing change but cannot argue articulately the actual elements of their side without disclosing their true loyalties toward preservation of the status quo. Rothbard suffers from the same malady:
    from Kevin O'Brien:’s-leap-of-the-right-and-the-left/

    "For example, Murray N. Rothbard of the Austrian School of Economics, spends the first part of his book A History of Money and Banking in the United States arguing the hard money position that fiat currency is dangerous, and that when states create funny money things go wrong. He spends the second part of his book arguing that once individual banks start dealing with the creation of money via fractional reserve lending, the government should keep its hands off. In other words, funny money is bad, but government regulation of such is worse. "