Creditism

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September 17, 2008

"I ain't never worked for a poor man." ~ George V. Davis

Capitalism is blamed whenever the economy inevitably contracts after an artificial boom caused by the creation of credit money. The boom and bust cycle is considered by most to be as natural as the tides. The ignorant media trumpet that irrational business people just go overboard for no other reason than pure human greed. So this willy-nilly, unfair system requires elite supervision! Capitalism is so wild and crazy that it must be caged by Marxist interventionist regulations. Oh, the irony. But wait, there has been a case of mistaken identity! Capitalism has already been caged, while its evil twin creditism has run amuck. We must free capitalism from its statist cage.

Marx coined the term capitalism as a derogatory term, but capital is just another word for savings. When capital is used purposely, we have capitalism. Invested capital leads to greater productivity and a more complex division of labor. Maybe if we called it savingism then more people could see the system of exchange and cooperation that spontaneously develops more clearly. This word better distinguishes the real system from its fraudulent step-brother. An economy built on savings, free-trade and secure property rights will grow based on the amount saved. An economy built on credit, central planning and fractional reserve banking will grow faster, but then collapse. Guess which type of economy we have today?

The imposter must be exposed and identified as such. The phony creditism must be revealed. First, let's take a look at real deal capitalism. The concepts of scarcity, time preference and property rights are integral to understanding the difference between capitalism and creditism.

Savings is the basis of sustainable economic growth. Without a surplus of goods, there can be no savings. People first must learn to produce the basics for survival. We all have remarkable adaptive skills for finding food and shelter, which are typically within reach of open eyes. Being resourceful in a world of scarcity is forever challenged by environmental conditions. Such is life. This is usually where hard work comes in. Finally when we produce more than we consume, the result is a surplus, or profit. Profit is good. It allows us to get a life.

What kind of life is then up to each individual. Economists call this time-preference. People who live for the moment have a short time preference while people who will sacrifice current consumption for future consumption have a long time preference. Sounds easy enough, but allocating the scarce resource that is the amount of time we have here on earth in an optimal way is hard, very hard. Life can be a real pain to work out, sacrificing for tomorrow while enjoying today. This balancing act is what we do; what we all must do to not just 'make a living' but prosper.

There is no formula or model that will ever be able to do more than provide historic snapshots from narrow perspectives. Trends and general observations that are pertinent to individual actions can only be determined by those acting individuals. Groups of individuals may work together in a way that enhances the capabilities of those individuals, but only after some individual has blazed the path before it.

For instance, let's say Og is subsisting on the berries, fruits, roots, leaves, eggs, and the occasional fish that he takes time to catch. His family has developed a division of labor, with the mother instructing the children, keeping wood in the fire and preparing the meals. The daughters gather eggs, leaves, berries and fruits. The younger boys dig out roots, gather firewood and help the girls. The older boys help Og fish and protect the family. So much time is spent gathering the ingredients of each meal that they often just roam from berries to fruits to leaves to river and on around the forest, eating as they go.

If he could figure out a way to gather more food per trip then they would have more fish, fruit, salad and everything else stored up, then Og could take time to settle into that really cool cave he's had his eye on. So Og decides to save up enough food to allow him to spend some of his regular gathering time to focus on how to gather better; that is, increase productivity.

Planning takes time, but pays off when done properly. In this case, Og invents a basket by weaving leaves together, thus allowing one person to carry the same amount as 7 or 8 people used to. The baskets work for fish, fruits, roots, and most other things. This leap in technology resulted from one man purposely deciding to act by sacrificing his present consumption for future benefits. A wonderful side effect is that so many others will also benefit from this new technology through trade. More people now have more time to do things other than gather food all day, every day. Bigger surpluses are saved, leading to more time to think about more innovations.

Og's time preference changed from the immediate short term to the future long term. Some call this making dreams come true, others just doing what a man's got to do, but the gist is that if you want to improve your lifestyle above that of an ape, then you'd better stop and think about doing it. Then, of course, do it. Consuming all your labor immediately results in a life of unending toil.

Increasing productivity by building on the foundation of hard work and savings is the story of civilization. Hard work, thrift and saving are what make dreams come true. This is the essence of capitalism, and it is a blessing to those who get it. The followers of Marx who consider hard work and saving to be 'bourgeoisie' and hold the noble human desire to better one's standard of living in contempt obviously don't get it. This is why they so easily conflate capitalism and creditism.

Laziness, reckless spending and building up massive debts are what kill dreams and destroy civilizations. When "moral hazard" is inherent in the official policy of the ruling elite, it is surely hypocritical to blame the suckers while the con men get away scot-free. But the elite prime directive is to salvage the system at all costs, even if that means a couple of elite scapegoats take one for the team. So let's have a look at creditism.

Creditism plays on the human desire to 'have your cake and eat it too.' The idea is to mobilize savings that 'is just sitting there' and make "idle money" more productive. This way of thinking seduces even the most intelligent people to give a wink and a nod to obvious fraud. In an environment where "everybody does it" is the standard of ethics, this practice becomes accepted, literally unchallenged in the face of hard truth. You see, creditism not only undermines financial systems, it also undermines the morals of a society.

Fractional reserve banking is pure fraud, even with commodity-backed money such as a "gold standard" system. Fiat money is the next step in this con game when fractional reserve banking gets injected with steroids. This typically is sold to the ignorant masses as a way to save the fractional reserve system from collapse. It is a shell game that the elites play with our savings.

I'm sure most of you know how it basically works. Joe takes his hard earned savings down to Bob's Bank and makes a deposit. Bob gives Joe a receipt for his $1,000 deposit and tells Bob he can come and get it anytime he wants, and he will receive interest for leaving it there. If the "legal" reserve requirements are 10%, Bob turns around and loans out $900 to Sue, who promises to pay back the bank with interest. Sue then takes that $900 to her bank and makes a deposit, for which she gets a receipt. This process pyramids ($810, $729, $656 etc.) until the system has created almost $9,000 of credit money. Now that ought to stimulate the economy, you know, prime the pump, because it fools everybody into believing that they need to produce more goods and services to supply the demand created by the credit money expansion. Brilliant!

This method of creating artificial demand with artificial money also leads to much lower interest rates, which then foster even more borrowing. This alters the time preferences of the individual decision makers living under this type financial system. More and more credit money is required just to service the interest on past loans. Managing the mania gets harder and harder to do all the way up until the inevitable defaults expose the ruse and the system collapses.

The obvious weakness of this pyramid scheme is when Joe wants to spend his money and makes a withdrawal, or Sue defaults on her loan because the demand for her use wasn't really there to begin with. But don't worry, because legal accounting practices that Enron would kill for allow banks to borrow--I mean "raise capital," perform a "credit swap," etc.--from the central bank or other banks to cover one or the other. When both occur simultaneously, it really means trouble. Of course, the banking elite saw this coming after centuries of getting caught and suffering "runs" on their banks, and so they created a "lender of last resort" to save all their butts.

When you promise the same money to two or more different people, a little bit of tricky accounting will always be required. But hey, everybody does it and man, look at the economy grow! Of course, defaults and withdrawals send ripples through the entire financial system that is really a house of cards. An economic system built on this flimsy financial system must also be flimsy. The primary purpose of central banks is to provide a fa'ade of viability to this fragile system when it becomes evident that it's not working. This is where we are today.

There was a time not so long ago when common wisdom said to save up your surplus money after paying for what you needed to buy what you wanted. I worked summers and weekends to save up enough money to buy a car when I was a teenager. The time preference that called for sacrificing a little present consumption for a larger cumulative purchase was in the culture I grew up in. This capitalist work ethic has been replaced with a creditist borrowing ethic. It was a bad deal, and here is why.

If you make $10 an hour (say after taxes) and want to buy a $10,000 car, then you must work 1,000 hours (25 weeks working 40 hour weeks) to pay for it. Let's say that you just can't wait because your time preference is one wanting immediate satisfaction, so you borrow the money at 10% annual interest over a five year term. Instead of paying $10,000 for the car, you now must pay about $12,750, or 28% more for the same car. That means that you had to work an extra 275 hours (almost 7 weeks) longer to buy the same car. Basically, you traded 25 weeks of your labor for the car and 7 weeks of your labor for the immediate use of the car (not counting the 7 or 8 weeks you paid to the government for the privilege of it all).

Now try doing the math for a house and adding in furniture, appliances, vacations, clothes and anything else that you must have immediately and buy on credit. It adds up eventually to the point where you are working just to pay the interest and the principal never gets paid down. In effect, you are a slave to the bank now in addition to being a tax-slave to the state. Banks and the state: what a pair.

A real interest rate can be decided in the market as the equilibrium between the time preferences of savers and the time preferences of borrowers works itself out. Individual savers decide: am I going to forego consuming my labor in order to lend it to someone else who can make it more productive and pay me for the use of it? Individual borrowers must decide: am I going to forego future labor in order to meet immediate needs or use it productively? There are very real needs and very productive uses that credit can be useful for, but when real interest rates are undermined by central planners and fractional reserve banking, then those immediate needs increase and the productive uses decrease. That's what I call a "credit trap." People get artificial signals from the credit market masquerading as the capital market. This financial system eventually makes fools of us all and the economic system then falters. It's not if this will happen, but when.

The belief that more regulations will "fix the problem" is moronic. As if the thousands of pages of regulations caging capitalism over the past 100 years weren't enough. A credit-money financial system wedded to statist politicians results in a bastard economic system, not free-market capitalism.

Capitalism is intertwined with civilization. When people work, save and invest, the society they form will prosper. When the elite become lazy and corrupt, they cage capitalism and parade creditism around in its place. The capitalist economic system thus gets blamed for the instability and resulting pain that the elite inflict on working people through their credit-money pyramid schemes. Credit-money financial systems corrupt not only the economic system but also the morals of society. We must teach our children that they can either eat their cake now or save it for later; pretending that we can do both because politicians and bankers promise it is foolish.

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Mark Davis is a husband, father and real estate analyst/investor enjoying the freedoms we still have in Longwood, Florida.