The subprime mortgage and banking crisis of 2008 has precipitated the spectre of worldwide depression.  Since that time we have seen recession, extreme monetary manipulation by the Federal Reserve, massive new governmental regulation of industry and finance, nationalization of the auto industry, movement toward total government control of healthcare, large increases in the national debt, multi-national sovereign debt crises, multiple wars, proliferation of the nuclear threat to terrorist states, multiple extreme natural disasters, and an anemic “recovery” that may fall into a “double-dip”.  If the world economy slumps into depression, massive unemployment, welfare, and poverty, the cause will be functional, not structural.  

In a depression, few goods and services are produced and consumed in the presence of a massively underutilized means of production, a willingess and ability of labor to produce, and a public desire to consume.  In a depression, the consumers cannot purchase – because they are not paid – because there is no production – because the consumers cannot purchase.  In a depression, the producers release qualified employees, and the banks will not lend.  In a depression, every sector of consumer and producer loses faith that investment in production will return a profit.  

The collapse of economic activity (goods and services exchange) arises from a breakdown in expectation of reward following effort.  In short, the world has lost faith in the societal economic contract.  The solution is a restoration of that faith. And, a strong first step would be recognizing the real nature of money as a representation of contract to produce value.

Question: Why has the faith been lost?  Why do banks hoard and not lend?  Why do corporations refuse to hire and produce?  

Answer: An act of economic betrayal has shaken the faith of the producing class.  Under Bill Clinton, the government began enforcement of the CRA, a program requiring the financial system to make house loans to buyers who could not qualify under the standards of actuarial statistics-based risk analysis.  The contractual fraud was enabled by government insured loans that protected banks against the risk of default.  Thus, local banks could comply with the unsound loan requirements, and unload the loans to government underwriters with financial impunity.  (Remember the ad slogans, “Lost another loan to Ditech”, and “When banks compete, You Win.”)  The unsound loans were bundled with other credit-worthy paper, graded as AAA by S&P and Moody’s, and sold by Wall Street to pension funds, charities, foundations, and municipalities as Mortgage Backed Securities, and Collateralized Debt Obligations.  When oil prices and the prime rate rose, the economy contracted, and those on the margins of the economy defaulted on their house loans, and the MBSs and CDOs began to default.  The betrayal of diligence in qualifying those to whom money was loaned was the wormhole through which unqualified contracts to repay were accepted as legitimate securities.  Thus, the promise to pay, the “word as good as gold” was depreciated, and a faith in the economic contract was dealt a serious blow.

This loss of faith in the economic contract (to produce value in return for receipt of money) causes an intangible disruption within the machine of trade.  When men lose faith in the ability of the larger economic sphere to consume new value, the financial institutions do not loan, producers do not expand capacity and hire, and the consuming public cannot consume beyond the meager amounts that subsistence production enables.  

Clearly, available productive capacity does not by itself produce a robust economy.  In the aftermath of 911, economic activity slowed dramatically, but little of that reduction was due to the actual destruction of capacity and displacement of workerrs.  Rather, the nation lost its trust in the safety of participating in life.  

The words “trust” and “faith” reflect an entire spectrum of relational transactions required to coordinate the group process of production, exchanging value for value, and consumption.  Production requires exchanging dollars for materials, tools, processing, and labor.  Consumption likewise implies an “exchange of value for value”.  All aspects of the economic cycle require money as a medium for obtaining materials, finished goods, tools, information, labor, or services.  

Thus, it is tempting to increase economic activity by simply printing money, and injecting it into the economy.  In fact, the entire Keynsian economic theory is based upon the premise that debt can stimulate economic activity.  And, to the extent that the debt is contracted by men committed to produce value and return on investment (due to demand for the products), such a system is actually effective.  But, when government simply spends money in projects such as transfer payments (social security, welfare, medicare, and unemployment), there is no contract to produce in return for the debt.  Thus, such debt expenditures are the equivalent of taking out a bank loan to buy groceries, seeing the doctors, and paying the rent.  Certainly the recipient appreciates having been enabled to consume, and there is economic activity enabled by the doctor, landlord, and grocer as they spend the dollars received.  But, there is a fundamental error in the proper method of money creation.  When the error is identified, we should intervene and correct it.  If money is created/printed/borrowed and spent to give to the unfortunate, it should either come from taxes or loans, with a commitment to repay with production.  But, both of these solutions to “the problem of the poor” perpetuate the problem by making poverty pay, and both solutions make the economic system weaker.

Restoration of monetary integrity depends upon establishing lending contracts that have a reasonable prospect of keeping the commitment.  Printing, loaning, or quantitative easing of any sort, disconnected from contract to produce value, will necessarily dilute the value of the dollar.  The economy can recover when the society dependably produces value according to the terms of contract, produces value in relationship to need, and thus reestablishes trust in the process of production, compensation, and equivalent consumption of value.  Fundamental to the solution of the economic malaise is a general societal paradigm shift regarding the meaning of money, and how new-money should be created.

And while there are many factors that must be addressed to correct the general economic slowdown, an important foundation is recognition of the actual nature of money creation.  Money “IS” a representation of contract to produce value.  Thus, money cannot be created by printing at the Mint, generating digital credit entries, or loaning by the Federal Reserve, without attaching a concomitant contract to produce value.  These strategies are used to quickly inject liquidity into the system, but without the associated contract for production, such scrip is as valuable as a xerox copy of a dollar bill.

A well known illustration of the dilution of the dollar’s value is the comparison over the years of the price of a fine suit compared to the number of ounces of gold needed to purchase that same suit.  Throughout the 20th century, the price of the suit has remained at approximately one ounce of gold, while the dollars to buy that coat have risen many fold.  The dilution of the value per dollar can be attributed to the injection of dollars into circulation without the appropriate connection of new-dollars to new-production.  The Fed has given a 1-2% per year inflation as acceptable, and now even desirable economy-management goal.  But, such a concept is nonsense.  The value of savings will necessarily dwindle with such a policy, the motivation to save necessarily diminished, and the productive capacity dedicated to increasing productivity will thus be limited.

Consumers have dollars in their posession that authorize redemption because someone has engaged in production of value.  The money received for producing represents the right to use and/or consume value.  The fundamental problem of economics is “Unlimited wants, and limited production.”  The solution to that problem is a society-wide contract of industry for production.  When many industries in concert begin to produce, then employment surges, compensation and consumption follow.  

The key to creating industry-wide faith is minimal taxes, stable and righteous legislation, equal justice before the law, secure ownership, and confidence in the stabilty of the future environment.  When these conditions are in place, industry will spend money to establish new productive capacity, hire, train, and pay labor.  

During the time of recovery, society should save a portion of the money injected.  This insures that consumption does not outstrip production, and leaves some money available in banks to loan for additional expansion.  In theory, if everyone spent their entire income each month, there would not be sufficient production to meet the demand in the early stages of the recovery.  But, as productive capacity was reached, consumption could robustly resume.  When value is produced and distributed, it may be consumed and enjoyed.  The challenge is to inspire enough confidence in business to venture the expenditure of hiring, producing, and installing new productive capacity when the economic activity and demand is low.

The dollars spent by those doing startup and production are in the chain of support that sustains those who produce the materials used to in a product.  The circle of economy stretches wide and is deeply interconnected.  It is impossible to create a simple flow chart of production, consumption, and money.  Nevertheless, recovery comes when the vast sea of humanity participates in borrowing, producing, consuming, and exchanging money for value in each step of the process.  

The socialists/communists have a simplistic view of economy, believing that the problem of scarcity will be solved by central control or elimination of the layers of heirarchy and ownership.  These are flawed theories, since there is a place for: all classes of society, all layers of government, and all divisions of economic responsibility.  The simple man is seduced by the apparent logic of efficiency of central control, or fairness of worker owned industry.  The evil man uses the gullibility of the simpleton to enroll a mob that responds to slogans and gives force to his demands of state ownership and/or the classless society.

In constrast to the socialist/communist simpleton, the man who supports the Righteous Republic must commit to deep participation in the balancing of government and social forces on many levels.  These include: industrial demand in relationship to the needs and wants of the consuming public.  Government is the tool of regulation over various economic, national, and industrial bodies.  

Each of the voices of the societal entities seeks to organize law, culture, and economy around its own interest.  Thus, these various layers and institutions will best harmonize if each seeks their best advantage according to the rule of God’s Law.  The layered and interrelated complexity of economy, government, and society creates a robust system stabilized by the dynamic tension of many layers of checks and balances competing to create stability and satisfaction of each unique need.  The foundation of a prosperous and happy society is a righteous heart guiding each man in his individual duty to God, others, and self, in his economic, political, and societal role.

To resolve the problem of the injection of new-money into the economy the following steps should be engaged by the banking system.  

Other Economic concepts and tools that must be considered include: Fractional Reserve Banking, bonds, interest, the gold standard/Forex, inflation/deflation, and money supply.  Regarding FRB, this concept is replaced by the overt and acknowledged creation of new money by the production of new value.  Bonds are simply an instrument of financing new production through old-money.  

The dollar should be on the Gold Standard, in the sense that the economy should issue new money at a rate that the value of the dollar neither rises nor falls in relationship to the amount of goods and services an ounce of gold will buy.  In effect, the value of the dollar is related to the money supply.  If the value of the dollar was deflating, then the dollar would buy more goods and services compared to an ounce of gold.  If this happened, then the Fed (or other monetary advisory agency) would authorize banks to release  an appropriate increment of new-money into circulation.  This could be used to purchase new productive capacity, or old-value.  And, if the dollar started to inflate, then new loans would be comprised of more circulating money, and less new-money.  

But, inflation is a late indicator of the money supply.  A better indicator to prevent inflation from starting is the purposeful monitoring the rate of production, and rate of increase of production of new value.  From these parameters it will be possible to judge the appropriate rate of issuance of new money.

The Bank will be making money, by collecting interest, on the repayment of money, both on old-money and new-money loans.  A percentage of the interest will go to the investor who has saved and is putting dollars in the bank.  It is appropriate to compensate the saver with interest because he is delaying consumption.  The delay of consumption reduces the demand for production, and allows industry to devote labor and investment energy in establishing more productive capacity, and greater efficiency.  Thus, in the future the industry will be more profitable, and the investor will reap the rewards of his delayed consumption.