The Free Lunch


Column by Paul Hein.

Exclusive to STR 

If you watch political commentators on television, you won’t have to watch very long before the subject of the national debt is introduced. That, in itself, is interesting, because the national debt has been around for a very long time indeed. Evidently it has reached such proportions today that it cannot be ignored, and the pundits are wringing their hands, asking, “How are we going to pay this debt?” Sooner or later, someone is going to point out what he thinks obvious: there’s no free lunch.
Yes, there is. It works like this: You have lunch, and when you’ve gotten the bill, you tender an IOU for the cost of the meal. What did that cost you? The restaurateur even furnished the pen and paper! A free lunch!
I can hear you saying, “Free? Wait until you have to pay that IOU!” This is where it gets interesting. You and I, to be sure, will have to come up with payment. But I didn’t say that there was a free lunch for everybody! In order for your lunch to be free, you must have the right connections. Specifically, you must have a close relationship with the rulers, so that when you ask them for a favor, they will grant it for you. The favor you ask of them is this: Please declare my IOUs a “legal tender.” That makes all the difference.
If you obtain another’s goods or services by offering (tendering) a note, or IOU, which you know is worthless, and which you have no intention of paying, you are a thief. There are laws against such things, as there ought to be. It is not legal to knowingly tender (offer) a bogus, or non-redeemable, note. That is why you must have your friends in the government gang declare your notes legal to tender. Once they have expressed their official approval of your non-redeemable notes, money is no longer an object--literally.
The restaurateur is happy to accept your bogus note, because, being legal to tender, he knows that, even though it is not a valid note, he can, without committing a crime, “spend” it to pay his bills, and his creditors are likewise willing to accept it because they can pass it as well. Besides, you have them printed so elaborately that their very appearance gives them an air of importance and validity. In no time at all, the money which bank notes once represented disappears from circulation, and from the minds of the people as well.
Most of what passes for money today is not paper, however, but credit--numbers in a bank account somewhere. The same principle applies, however. When you pay for lunch with a credit card, the total amount due—less bank fees--is credited to the restaurant’s account, and you reimburse the bank. Now the restaurateur does not have a non-redeemable, though legal, “note” in his till, but a number added to his account. Where did that number come from? Someone, somewhere, borrowed “money” from a bank, which provided the loan simply by adding the amount to the borrower’s account. It did not subtract this number from another account, but created it anew. “Money” from thin air, in other words. From the borrower’s account it circulated through the economy, ending up in your account, so you could “pay” for lunch.
But whether it’s numbers on a bogus paper note, or (borrowed) numbers in an account (representing nothing), the fact remains that you and I have to work for those numbers; but the issuer of the note, or creator of the credit, gets them for nothing. He places the “money” he creates into circulation as a loan, and since he and his colleagues are the only source of “money,” this arrangement means that there will be a continuous demand for more loans, since each loan requires that more be repaid than was created. For such a fortunate individual, not only lunch, but everything else is free.
Did I hear “equal protection of the law?” Try printing your own bogus notes and using them to buy lunch, and find out how equal you are!

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Paul Hein's picture
Columns on STR: 150


Suverans2's picture

G'day Paul Hein,

You wrote: I can hear you saying, “Free? Wait until you have to pay that IOU!” This is where it gets interesting. You and I, to be sure, will have to come up with payment.

    For clarification, are you not assuming, in the above statement, that "I" is a voluntary member in the group that borrowed that IOU into existence?

You wrote: If you obtain another’s goods or services by offering (tendering) a note, or IOU, which you know is worthless, and which you have no intention of paying, you are a thief.

    Is not the "worth" of a thing determined in the mind of the one freely accepting it in trade? If that is true, then it is only "worthless" when no one will take it in trade.
    That aside, is not that IOU now backed by the "labor, wealth and property" belonging to the voluntary members (citizen/subjects) of the group that borrows it into existence?

You wrote: The restaurateur is happy to accept your bogus note, because, being legal to tender, he knows that, even though it is not a valid note...

    If he is like the majority of the voluntary members of the group he has virtually no idea that FRN's are not valid notes, nor is he truly conscious of that fact that as a voluntary member of the group he (his "labor, wealth and property") stands surety for the debt.
    Aside from common sense, this can be easily verified by looking up the words "strangers" and "stranger" in one of their own law dictionaries, (Black's Law Dictionary, Sixth Edition, page 1421).
    Strangers. ...In its general signification the term is opposed to the word "privy." Those who are in no way parties to a covenant or transaction, nor bound by it, are said to be strangers to the covenant or transaction. See also Stranger.
    Stranger. who, in no event resulting from the existing state of affairs, can become liable for the debt, and whose property is not charged with the payment thereof and cannot be sold therefor.
    Can it be made any clearer than that?
    Oh, and one last thing...

You wrote: Did I hear “equal protection of the law?”

    Quod ad jus naturale attinet, omnes homenes aequales sunt. All men are equal before the natural law. Dig. 50, 17, 32. Maxim of Law from Black's Law Dictionary, Sixth Edition (c.1991), page 1421
    One would have to be totally blind not to see that all persons are not equal before the civil law, that some of them receive just a bit more protection than others.
    Under the civil law, "All animals are equal, but some animals are more equal than others".
    Homo vocabulum est naturae; persona juris civilis. Man (homo) is a term of nature; person (persona) of civil law. ~ Black's Law Dictionary, Sixth Edition (c.1991), page 736
David Calderwood's picture

It strikes me that money enters the economy mostly by creation of new debt (credit), and the primary vehicle for this during the past century was via home mortgages.

This bid up the price of everything as such liquidity flooded the economy, so prices for goods, services, and (most importantly) assets rose like crazy.

The problem as I see it is that money can disappear when this process is reversed. The standard assumption these days seems to be that the final act of fiat money is opening, and that it will be a tumultuous hyperinflation. This view underpins exhortations to stock up on gold and silver.

My assumption is that the scene today is part of the 2nd Act in a three act tragedy, and that it will be accompanied by a debt revulsion, which will look like a collapse in the money supply and be called "deflation." Paradoxically, this suggests that paper dollars, the most spat-upon medium of exchange among nearly all people, will be THE asset to hold for a period of time.

If this occurs, the clowns ruling us will hoist on their own petard. They have waged war on cash for a century, and today it is quite difficult to "cash out" of a bank account of any significant size. They really don't want to "give you the money" all that much. This means that if there is a serious Black Swan event that hits the banking system, few people will have any cover from the storm because very few people have any cash to speak of at all.

Thus should we see a century of currency debasement teach all the wrong lessons for a brief period of time. That's my view, anyway.

Jim Davies's picture

Very interesting perception, David! It is striking for sure that of the two-plus trillion so far printed since ought-eight, very little has caused price inflation. It's as if it just vanished into a black hole. Perhaps you're right, that money was destroyed when the housing bubble burst and the freshly minted money just restored bankers' assets. Why they aren't lending it out now remains, for me, a bit of a puzzle. Perhaps they are waiting for the second shoe to drop, in Europe.

But how do you foresee the FedGov debt problem being solved, in the deflation scenario? I understand they owe about 100% of GDP, around $13T, and that won't go away. The math makes every option very hard.

Even to maintain it, they have to roll it over, selling a trillion or so per year in fresh T-bills, but as their fundamental insolvency becomes more and more obvious, that will get increasingly harder. They would need to sweeten the deal with higher interest rates, and those will kill off any recovery and so choke off new tax revenues and add to the debt.

To pay it down, as they should, would mean raising taxes and/or slashing "benefits" and while President Paul might do the latter, nobody else has shown he knows how; a tax hike would, as above, kill off any recovery and add to the debt as much as was being paid down.

Third and final option: debase the currency, pay the debt off with cheaper dollars. This is what they have been doing already for several decades, so why not continue? - answer, lenders are now wise to it, and reckon their returns in depreciated dollars, and so may not buy enough T-bills to roll over the rest.

It may be that none of the three will work, in which case the USA will follow the PIIGS into sovereign default, and I think that will mean hyperinflation. But of the three, the third looks to me the most likely to be chosen; if it works, it does mean continuing money creation and therefore inflation rather than the deflation you foresaw. Not hyper, but steep.

David Calderwood's picture

Hi Jim,
This is what occupies a lot of my thoughts. There are several posited paths ahead, and they are as different, preparation-wise, as different as Great Drought vs. Great Flood. Figuratively, do I build a cistern or an ark?

I initially typed up a VERY long reply, but then decided to edit it, expand it slightly, and ask Rob to publish it as my second column for STR. We'll see if it makes the grade, and if not, I'll come back and try to explain my somewhat odd rationale on this subject.