If we are to restore our harmony with Nature and ourselves we will need to address issues that are profoundly private, too frequently neglected and often looked upon with shame
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If you look at the growing debt (both personal and national) I believe we are in or entering a form of Neo-Feudalism where there is a gap between the Corporate Elite and the indebted ruled classes. I believe that as Cascadians one of the potential reasons we will need to establish a free,indepenedent and reunited Cascadia is to destroy the yoke of slavery due to debt. I believe the Corporatists are moving their headquarters, stock, investments, and the like offshore so that when there is an economic collapse they will return to buy up property, debt, bankrupt companies and even entire states. Recent examples of companies moving out is Halliburton to the UAE. Though I ma not of the Male Monotheistic religions (Abrahamic religions like Islam, Judaism and Christianity) that have laws (often not followed) forbidding usary (the adding of interest on loans) I believe that usary or even debt can and should be view as a human rights violation because it can take advantage of somene during dire times. Debt slavery is the source for much of the world1s prostitution and sweet shop labour. As a Cascadian I believe like our struggle for ecological harmony we will need to also address debt. For a people in desperation (be it due to famine, poverty, debt or war) will never be able to create or live in ecological balance with their surroundings. We, as Cascadians, MUST address the causes of poverty, homelessness, imperial war, class desparity, racism, gender chauvanism, issues of civil rights, the rights of sexuality, migration and all these are truly connected in this economic war to keep a divide.

The folowing are articles and wikipedia entries on issues related to this issue:


Debt bondage
From Wikipedia, the free encyclopedia
en.wikipedia.org/wiki/Debt_bondage
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Thom Hartmann reads for free some of his book "Screwed: The Undeclared War Against the Middle Class"
a1135.g.akamai.net/f/1135/1...ter_7.mp3

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More debt for Americans is 'normal'
BY JOHN LELAND, The New York Times
Article Last Updated: 05/18/2007 09:21:45 PM PDT


YPSILANTI, Mich. - On a recent evening, Christine Moellering, 40, sorted through the plastic laundry basket where she keeps the family bills, statements and coupons.

"The Sears one is 32.24 percent," Moellering said, reading a credit card statement with a balance of $5,955, including $155 in monthly finance charges. The high interest rate took her by surprise. "That's nice," she said sarcastically.

Shuffle credit cards

Moellering and her husband, Mark, 39, earn average salaries for their age (together about $66,000 a year), live in an average-priced home and have an average cost of living. But like many other households these days, they have found that their day-to-day economic life has come to depend not just on how much they earn or spend, but also on how well they shuffle what they owe among a broad array of credit cards, home equity loans and other lines of credit.

Americans spent 1 in 7 of their take-home dollars on debt payments last year, up from 1 in 9 in 1980. Experts say few consumers are able to calculate the true costs of such payments.

Behind closed doors, the decisions that families like the Moellerings make about their debt - when to pay it off, when to shuffle it to lower-interest sources and when to let it revolve and build - can determine how much their salaries are worth. Like many others, the Moellerings have run up avoidable penalties and occasionally spent themselves into more debt or higher interest rates, even as they have tried to juggle other balances to bring down their monthly payments.
This spring, they allowed a reporter to see how they struggled with these choices. Christine Moellering's laundry basket recently included more unwelcome news: $2,693 due on a Visa card through her credit union, including finance charges of $25, and $13,680 on a CashBuilder Elite Visa, including a monthly finance charge of $200.

Their credit card debt came to $22,228, including $380 in monthly finance charges. Interest varied from 12.1 percent to 32.24 percent. The Moellerings also have a mortgage of $93,000 and a home equity loan balance of $68,574, at 8 percent interest.

"We have friends in the same position," said Christine Moellering, who earns $30,000 a year as an administrative assistant. "One was off his insurance for a couple weeks and he broke his arm, and they're out $25,000 or $30,000. We've talked to them about it. It doesn't matter what you do, you always have that credit card debt."

Credit widespread

Just a generation ago, financial profiles like the Moellerings' would have been unusual. But changes in federal regulations since the 1980s, along with consolidation in the banking industry and changed consumer attitudes toward borrowing and saving, have made credit more widespread, more heavily marketed and more confusing, with offers of more credit - at low rates - extending to even the least reliable risk. In 2006, the industry mailed out nearly 8 billion credit card offers, up from 3.5 billion in 2000.

Credit card debt, less than $8 billion in 1968 (in current dollars), now exceeds $880 billion, more than tripling since 1988, adjusting for inflation, according to the Federal Reserve Bank. Penalty fees alone cost consumers $17.1 billion in 2006 - up from $12.8 billion in 2003, adjusted for inflation, according to R.K. Hammer, a bank card advisory firm.

At the same time, as banks have moved from fixed interest rates to variable rates, the ability of borrowers like the Moellerings to move balances from one card to another, or from credit cards to lower-interest home equity loans, can have as much impact on their finances as whether they get a raise or trim household expenses, said Greg McBride, senior financial analyst at Bankrate.com. Especially since 2001, McBride said, as home values have increased and interest rates have dropped, home equity loans have enabled families to carry more debt - to buy more things - at lower cost.

"It's a whole change in what we consider normal now," said Vanessa G. Perry, an assistant professor of marketing at the George Washington University School of Business. "Not only has the total amount people borrow increased, but the number of instruments we borrow on has increased. An average family has a mortgage, home equity loan, various credit cards, a car loan, maybe a student loan."

www.dailynews.com/news/ci_5933213

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Consumer Debt: Not an American Monopoly
by Gary North


The sheer scale of consumer debt has made millions of households extremely vulnerable to shocks in the economy, both from fiscal mismanagement and external factors such as oil price rises, acts of terrorism and wars. A downturn in the economy would create serious economic and social problems for the fifteen million people who struggle with debt repayments. Debt is a time-bomb which could be triggered by any number of shocks to the economy, at any time.

~ Griffiths Commission on Personal Debt (March 21, 2005)

In a story released to the press on March 21 and published on Yahoo and in English-speaking outlets around the world, the Conservative Party warned of rising consumer debt in Great Britain. What caught my eye was the author: Lord Brian Griffiths. Before he became a peer, Dr. Griffiths was Dean of the Business School at the City University of London until 1985, the year he became the head of Mrs. Thatcher’s policy unit.

I remember this all too well. I was sitting in his office on the day he got the offer. That cost me an important taped interview that I had flown to London to conduct. One day earlier, and I would have recorded a classic – "the one that got away." From that day on, he became too famous to give interviews as explicit as the one I would have conducted. He had to turn me down. I saw him again in the late 1980s. My parting words were, "Let me know when you’re a nobody again. I still want that interview." So far, he’s still a somebody. No interview.

UK faces consumer debt "time bomb"

The UK faces a potential consumer debt time bomb that could be triggered by an external "shock" such as rising oil prices or from rising interest rates, a report from the UK’s Conservative Party said.

Britain’s consumer borrowing has reached the 1 trillion pound mark and a sudden shock could impact on 15 million people, the report said.

The report, compiled by Goldman Sachs International vice-chairman and Conservative Brian Griffiths, said credit in the UK has been "too easily available and marketed far too aggressively."

Griffiths called for the voluntary Banking Code to be replaced with a statutory "customers charter" to help tackle the spiraling household debt problem. This would outlaw aggressive marketing practices and increase transparency of credit card charges.

"There is a real need to improve the quality of information made available to borrowers (who) need better support once they get into financial difficulties and independent advice to restore their financial stability," Griffiths said.

He told a news conference that the sheer scale of consumer debt has made millions of households vulnerable to external economic shocks such as rising oil prices, wars and terrorism.

He also criticized the Bank of England for being "too sanguine" about the level of debt, adding that as the debt-to-income ratio had gone from just under 100pc to 140pc in recent years it had become a "time-bomb which could be triggered by any number of shocks to the economy at any time."

Griffiths is not just an academic economist. He oversaw much of Mrs. Thatcher’s de-regulation program, which transferred many of the state-run monopolies to the private sector. She made him a life peer in 1990.

He then became Vice-Chairman of Goldman Sachs International. This is one of the major investment banking houses in the world. In the United States, Goldman Sachs is considered one of the Establishment investment banking firms.

That is why I regard his authorship of the report as important. This is not simply a policy paper issued by a party out of power that may be facing an election in May, if Blair calls one, as is expected. Griffiths is putting his reputation on the line: academically and professionally.

Unlike most economists, Griffiths brings an explicitly moral perspective to his economic analyses. He is the author of two books, Morality and the Market Place and The Creation of Wealth: A Christian’s Case for Capitalism. It was these that I had hoped to interview him about. He told me at the time that my 1973 book, An Introduction to Christian Economics, was the first one he had read on the topic.

Having followed his career from a distance for over two decades, I conclude that he is not raising a false alarm for publicity’s sake. The threat of a debt crisis is real.

POSITIVE FEEDBACK AND MASS INFLATION

Under a gold coin standard, there is negative feedback on the expansion of credit. If bankers create too much money, depositors will come down and demand gold coins for their checks or banknotes. A bank that cannot redeem these notes is declared bankrupt.

Without a commodity standard with redemption on demand, the monetary system moves into positive feedback. Here is an example. During the French Revolution, the government confiscated the church’s lands. Then it issued paper money against the value of these lands. The bills were called assignats. No one could redeem assignats for a specified piece of land. But the government promised to restrict the issue of assignats by the value of the land.

This created a positive feedback condition. The price of land was measured in assignats. The more assignats the government issued, the higher the price of the land went. But the higher the price of the land went, the more assignats this authorized the government to issue. Within two years, all prices were soaring. The economy went to barter or black marketing. The currency was ultimately destroyed. The story of this disaster was written almost a century ago by Cornell University’s Andrew Dickson White, "Fiat Money Inflation in France." You can get in free online.

When the dollar was removed from the citizen’s gold standard in 1933, abolishing citizens’ right to own gold, and again in 1971, when convertibility on demand at $35/oz was abolished for central banks, the interest rate, especially in the bond markets, became the only major limiting factor on the Federal Reserve System’s ability to inflate the money supply. Fear of interest rate increases, meaning fear of falling bond prices, became the restraining factor. This fear kept Bill Clinton’s spending plans tightly in check – a fact he learned in his first few days as President.

In the housing market, there is a positive feedback condition. The size of the loan is limited by the appraised value of the house. But if mortgage interest rates drop, then a borrower can afford to borrow more money and still make his monthly mortgage payments. More borrowers show up for loans because more people become eligible at the entry level.

They start bidding against each other. Up go home prices. Appraisers tell lenders that prices are up. Lenders are then willing to loan more money to buy these more expensive houses. The spiral begins.

Now there is evidence that some appraisers have committed fraud, reporting higher than market prices to lenders, so that lenders could extend even more credit to home buyers and re-financing owners. This has placed lenders and borrowers at risk during an economic recession.

How high can it go? The median price of a home in California is $465,000. Incomes did not rise to keep pace with these prices. Marginal buyers are driving up the price of those few homes that are offered for sale. The high price received by these marginal homes is imputed to all homes by the appraisers. All home prices go up, not just those offered for sale.

The two negative factors are these: (1) the number of people who can afford to buy an entry-level home; (2) interest rates, which affect #1. Until these kick in, a region can experience a housing boom. It can become a mania.

In the United States, housing on the two coasts have been bid up beyond the ability of most entry-level couples to buy. Florida housing is also appreciating fast. A man I know has equity profits of well over half a million dollars in three years. He is taking his money and running. He will move to Kerrville, the hill country of Texas, which was cheap a decade ago, but not now.

People not in these boom areas are locked out from them. They cannot afford to move in. Population will flow out, especially among younger workers. Businesses will locate in the heartland, where housing prices are lower. They will be able to hire talent cheaper.

But in high-priced areas, housing prices will not fall back to what they were a decade ago unless mortgage interest rates soar. The ratchet will have its effect.

THE RATCHET

We know what a ratchet is: a geared cog with teeth that are designed to be locked in place by a lever. A spring is attached to the cog. The tighter the spring, the more tension is on the cog. As you turn the cog against the spring, it gets more resistant. Raise the lever above the teeth, or else let go of the cog’s crank handle before you lock in the next tooth, and the cog will whirl in the opposite direction. Woe unto whatever is on the pulley that is attached to the cog. The higher it is up the pulley, the farther its fall to the earth.

The commercial banking system is the cog. The central bank keeps cranking this cog: buying T-bills.

As with any ratchet, there are two ultimate limits: the tension on the spring and the resistance of the spring’s metal. At some point, the spring snaps. In monetary affairs, this is mass inflation. Ludwig von Mises called this the crack-up boom, when money dies. The other limit is tension – in the case, interest rates. At some point, the spring can’t be cranked any tighter without driving short-term rates up and causing recession.

Move the cog up one more notch, and the lever may break loose mid-lock. The cog will spin backward like a propeller. That’s called depression/deflation. That’s what happened 1929–33.

Short of a gridlocked banking system, where leveraged debts cannot be paid off, the greater risk today is inflation. The FED keeps cranking the cog. Debts keep getting agreed to at ever-higher prices.

THE COILED SPRING

Most people have entered into multiple debt agreements. They think that prices will not fall. If prices do fall, owners’ equity will disappear. The appraisers will then have to report lower prices, which will lower the loan value of property.

The entire economy today is way up the pulley. Contracts are made at one level up the pulley, and then it rises higher. What if this process reverses? It did in Tokyo real estate, 1990–2005.

The FED has created a boom by expanding the money supply. Now it is trying to unwind the boom’s low-interest foundations without jeopardizing the boom. It is slowing the creation of money. But it does not want to create an unsprung ratchet.

The FED is tightening money. A handy way to follow this is to go to a newly created blog site, created by one of my readers. This blog site serves as a good model. It is run for free on blogspot.com.

He offers several handy links on the right-hand side. Click MZM, money of zero maturity. MZM is down at an annual rate of almost 3% since mid-January. Since early June, 2004, it is up 0.9%.

Using the Median CPI figure, price inflation is up 2.4% for the last 12 months.

There is a ratchet. Prices do not fall. But by slowing the creation of money by restricting its purchases of T-bills, the FED has restricted this upward ratchet move.

But remember: this ratchet never falls here. When it threatens to fall, the FED inflates money. Look at the adjusted monetary base since late January. It is now in the 10% range, despite some backing off over the last few weeks. (Adj. Monetary Base 2) Over the last four years, the move is relentlessly upward. (Adj. Monetary Base #1)

THE CONSUMER DEBT RATCHET

Consumers have bid up the prices of goods with fiat money. Then they go into further debt to buy more of these goodies. This is a ratchet phenomenon. The restraining factor is upward interest rates. This process has begun in the short-term debt markets in the United States, but it has not yet affected consumers’ desire to buy more goodies by going into more debt.

The decisions of millions of consumers, all over the world, to raise their level of debt has created what the Griffiths Committee calls time-bomb conditions. England is not alone. Consider this report from Canada.

Some finance experts are warning Canadians must wean themselves off debt, otherwise they face a major shock if interest rates rise.

"It could be catastrophic in terms of the whole economy," says financial counselor Allen MacLeod.

Interest rates have been quite low in Canada for the past several years.

But Canadian paycheques have grown very slowly. To prop up their standard of living, many Canadians have resorted to cheap credit and stopped saving money.

Lines of credit have grown at a record pace in Canada, up 30 per in 2004 alone.

Holly McIntosh and Frank Lestage’s bank offered them a line of credit a few years ago.

"They just give you the money and people spend and spend," Lestage said. "It doesn’t take long to get it under control, but you have to realize what you’re doing and that takes a while. You have to get in trouble to realize what’s going on." . . .

"I think as things have gotten more expensive, we’ve (become) a need-to-have-now generation," says Cindy Cassidy.

And that’s part of the problem, says consumer advocate Mel Fruitman: "Consumer debt as a whole in Canada exceeds consumer assets. That means we’re on the brink."

MacLeod says personal bankruptcies are up more than 10 per cent since January.

The article goes on to say that TD bank says there is no problem. Obviously, not many bankers are going to sound the alarm.

CONCLUSION

Consumers worldwide are being lured into more and more debt. They will have to reduce spending. This has not happened yet. But as the FED tightens money, allowing short-term demand for loans to push up rates, the traditional response is a falling stock market.

I think we’re there.

March 31, 2005
www.lewrockwell.com/north/north356.html

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Debt: An Inescapable Concept
Part 2: Personal Debt
by Gary North
by Gary North


DIGG THIS

Debt is an inescapable concept. It is never a question of debt or no debt. It is always a question of which kind of debt, owed to whom, when.

In my previous chapter, I covered the issue of social debt. I showed why it is inescapable. Personal debt is as inescapable as social debt.

Let’s say that you are hired for a new job. Normally, you must work until the next scheduled payday before you are paid. You therefore must extend credit to your employer for the monetary value of your work. The more you earn per hour, the more credit you must extend. The longer you must wait until payday, the more credit you must extend.

Here is the irony: You, who are not rich, must extend credit to a company you believe is economically successful. In such arrangements, which are universal in the job market, the relatively poor person is required to become a creditor to the relatively rich organization.

On the other hand, what if the employer pays you immediately, as soon as you begin work? The paycheck is for your salary after taxes until the next payday. The employer extends credit to a new, untried worker. You probably have never heard of such an arrangement. If I were an employer, it is the one I would use.

Maybe the employer abides by the Mosaic law governing employment. "Thou shalt not defraud thy neighbour, neither rob him: the wages of him that is hired shall not abide with thee all night until the morning" (Leviticus 19:13). Still, you must extend credit to your new employer for at least one work day.

Debt/credit is inescapable. There must be some degree of trust operating for an exchange of labor for money to take place.

There are critics of personal debt who issue universal condemnations of the debt/credit relationship. They have not thought through the logic of their position. If there were a universal cessation of debt, civilization would collapse within days. The division of labor would cease.

RISK AND TRUST

For the person who sells his labor, there is a risk that he will not be paid at the end of the payment period. This risk is low, because employers who want to stay in business must pay their workers. A bad reputation here will dry up the supply of future laborers. But there must be an extension of trust by the employee.

For a company hiring a new employee, there is always a risk that he will not show up on time, or he may perform poorly, or he may steal things. There must be an extension of trust by the employer.

Both parties must deal with risk. Both parties must extend trust. This risk may be low, and this trust may be low, but both are mandatory in a society that has a division of labor.

When an exchange of labor for money takes place, there is an almost inescapable element of time involved. Where there is time involved, there are both risk and trust.

In Elia Kazan’s little-known 1963 movie, "America, America," there is a scene where a young Greek, who has been defrauded repeatedly, buys a ticket from Greece to America, sometime around 1920. He is using money he obtained through fraud. He tells the ticket salesman to hold out the ticket. He in turn holds out a wad of money. He extends the money to the ticket seller, while he reaches out to take hold of the ticket. Only when he has the ticket in his hand does he let go of the money. The salesman also lets go of the ticket. There is no time element and therefore no extension of trust.

We cannot run an economy based on simultaneous transactions like this one. They take too much time to arrange and execute. A ticket salesman will do it one time for a peculiar, fearful, distrustful buyer, but not all day long.

The debt/credit relationship is therefore an aspect of the time/trust relationship. The latter cannot exist without the former. Civilization cannot exist without both.

INTEREST PAYMENTS

When you sell your labor until the next paycheck, you are selling present goods (labor right now) for future goods (money later on).

Would you deposit money in your employer’s bank account in order to receive the same amount of money in a month? You might if you had currency, and there had been a wave of robberies recently. Your employer is providing a service to you: safe storage. But without some external risk that you regard as a great threat to your money, you will not voluntarily surrender money today for the same amount of money tomorrow or next month or next year.

This is because you discount the value of future money in relation to the value of today’s money. This principle applies to every scarce resource, not just money. You are responsible in the present. You have assets in the present. You have alternative uses for these assets in the present. So, the present is more valuable to you than the future is. It is close at hand; the future isn’t. The present is real; your future is problematic. The value of a good owned in the present is greater than the value of the same good owned in the future.

This is a matter of comparative risk: safety now vs. safety later. It is also a matter of time preference: the benefits of now vs. the benefits of later.

To persuade people to surrender their lawful control over some good, a borrower must offer an increased quantity of goods in the future. We call this the rate of interest. It is the result of the discount that people place on future goods vs. present goods. The borrower must overcome this discount by offering more in the future for a good borrowed now and not returned until a future date.

The critics of the debt/credit relationship acknowledge neither the risk factor nor the time-preference factor in every transaction involving the surrender of control over an economic resource. They treat transactions involving surrender and return over time as if time and trust were free goods. But there are no free lunches and no free time.

Whenever a valuable scarce resource is treated as if it were a free good, there will be an analytical error in the discussion of economic cause and effect.

When any critic of the free market calls for the intervention of the state to prohibit transactions that charge for inescapable costs of human action, he is calling for one or both parties to the transaction to extend a free good to the other. Perhaps this call is self-conscious. If it is, then the critic owes it to his listeners or readers to spell out in detail the effects of this call for a mandatory transfer of wealth to others.

Usually, the critic is unaware of the implications of his call for a ban on full payment for a transaction. He is unaware of his conceptual error: his treatment of something valuable as if it were a free good. He therefore fails to assess the outcome of political intervention into the market. He blames economic effects that he does not like on something other than his erroneous assessment of economic cause and effect.

RISING LEVELS OF DEBT

There is an economic law that states: "When the price of something falls, more of the item is demanded." This law is an extension of the concept of scarcity: "At zero price, there will be greater demand than supply." So, the closer to zero the price is, the greater the quantity demanded.

There has been a great increase in consumer debt in the United States over the past quarter century. There is a reason for this, one which is rarely mentioned: falling interest rates. The price of loans has been declining since the credit squeeze of 1980–81. Therefore, the quantity of loans demanded has risen.

Borrowers estimate how much debt they can afford to buy (carry). They look at their after-tax disposable income. Then they look at the price of debt: the interest rate. They borrow to finance their lifestyles.

The significant figure for both creditors and debtors is the household debt service ratio (DSR). This is the ratio of debt payments to disposable (after-tax) income.

In early 1980, the DSR for house renters was 24.5. In late 2006, it was 25.5. In other words, there has been no significant change. Renters know how much debt they can handle.

In early 1980, the DSR total for home owners was 15.9. In late 2006, it was 19.4. This was an increase of 22%. This increase came after 1984, after the Reagan recession (1981–82) was clearly over. Borrowers carefully estimated what level of debt they could handle and slowly and cautiously increased it.

This is not an example of what is sometimes called irrational exuberance. This was a careful long-term response to new economic conditions. The recessions of the 1970’s (1970–71; 1975) were behind them. Home-owning borrowers responded accordingly. They concluded that they could handle more debt. They were correct.

So, the household debt level increased among homeowners, but the debt service ratio did not significantly increase. Among renters, it did not increase at all.

DEBT AND CLASS POSITION

The significant change came in the reasons for this indebtedness. The Federal Reserve Bank of St. Louis publishes a chart showing the level of personal savings, 1947 to 2006. From 1947 to 1960, the increase was slow. It climbed in the 1970’s, but no faster than the dollar declined in purchasing power. It peaked in 1986 at about $340 billion a year, fell to $240 billion in 1987, rose until 1993 to almost $323 billion. Then it began to fall. It was under $170 billion in 2000, just before the recession of 2001. During the recession, it fell to $131 billion. It went back up to about $175 billion in 2004.

Then, in 2005, it fell sharply in the first quarter. By the second quarter of 2005, it went negative. For the year, it was negative $35 billion. Rarely does any economic chart show a decline this steep. Americans are today net borrowers in the $100 billion a year range. Individual Americans have not only ceased to save, they have fallen into considerable debt.

[Note: To obtain any year’s figure, use the View Data table. Add the four quarterly figures and divide by four.]

Rising home values have allowed this: assets to borrow against. So have falling interest rates. But why in 2005?

I offer this explanation. The Chinese central bank’s policy of monetary inflation and buying dollars to lend to Americans finally produced an unprecedented effect. A fundamental change in Americans’ attitude toward the future took place. Americans’ attitudes toward time shifted from a mild future-orientation to historically unprecedented present-orientation.

There may be a better explanation. I am willing to consider it. When we see a shift this widespread and this rapid, no explanation makes much sense. To use the term of a recent best-selling book, 2005 was a tipping point.

The practical question now is: What might tip it back? If nothing does, Americans will not recover the attitude toward the future that marked them from the beginning of the English-speaking nation in 1607 at Jamestown.

We have moved from future orientation to present orientation. Edward Banfield, a Harvard political scientist, four decades ago re-defined class position in terms of time orientation. Present-oriented people are lower class.

Using his definition, in 2005 Americans visibly moved from middle class to lower class. I regard this as significant for the nation’s economic future.

CLAIMS ON FUTURE INCOME

As far as consumers are concerned, it doesn’t matter who owns the capital inside the nation or the region where they spend their money. The free market sets the rate of return on capital. The process pays no attention to specific ownership within the private capital markets.

As far as consumers are concerned, it also doesn’t matter who loaned them the money they used to purchase goods and services. The free market sets prices, including interest rates.

It matters greatly – or should – to consumers what their future status as consumers will be. If they refuse to purchase assets that are likely to produce a positive rate of return over time, they are deciding to do one or more the following:

Remain in the work force much longer than their parents did;

Become much more dependent on their children than their parents did;

Accept a standard of living much lower as a percentage of their income as labor force members than their parents did.

As present net borrowers rather than present net savers, Americans are purchasing the future which they value most highly. They have recently elevated their estimation of the value of present consumption far above the present discounted value of future consumption. They are not only consuming their seed corn, they are borrowing more corn to consume. This is a voluntary decision. The free market allows them to make this decision.

This is the significance of the balance of payments deficit of about $800 billion a year. It points to an American mindset that discounts the future at a high rate.

Asian exporters, financed by Asian central bank inflation which keeps their currencies at price below what an unregulated free market would produce, are selling more consumer goods to Americans than Americans are buying from Asians. The Asians are lending Americans the difference – or in some cases, buying the capital assets that employ American workers.

Asians are buying legal title to future streams of income generated by American employees and taxpayers. American employees will not own any share of future income that is owned by Asian investors.

What is significant here is the time and trust aspect of this arrangement. Americans imagine that they will get something for nothing when they grow old. They believe they will receive future income streams despite the fact that they are selling capital or refusing to buy it today. They no longer believe that there is a relationship between the ownership of capital and future income.

In 2005, Americans finally bought the party line of the U.S. government: There will be something for nothing. "Social Security and Medicare will deliver the goods, irrespective of who owns capital that employs American labor and produces goods purchased by Americans."

From 1935, with the passage of the Social Security Act, until 1965, with the passage of Medicare, the American public mentally bought the government’s official line: something for nothing. In 2005, the American public finally bought it emotionally.

THE THEFT MENTALITY

There is no tooth fairy. There is no retirement fairy. There will be no streams of income for the vast majority of old Americans. There will probably be monthly checks. They will not buy much.

The rational basis of high expectations of future income can be only two things: (1) ownership of capital or (2) theft from people who own capital. Voters accepted theft as a legitimate source of retirement income in 1935 and 1965. As their faith in the productivity of theft increased, their faith in capital investment as the source of retirement wealth waned. In 2005, the tipping point occurred. Americans finally accepted emotionally the worldview of the drunkards in the days of the prophet Isaiah.

Come ye, say they, I will fetch wine, and we will fill ourselves with strong drink; and to morrow shall be as this day, and much more abundant (Isaiah 56:12).

Americans will wake up with a gigantic hangover in their golden years.

CREDIT CARDS

Once you understand that debt is basic to civilization, you should ask yourself: "What is good debt? What is bad debt? How can I avoid bad debt?"

There are financial counsellors who recommend that people tear up their credit cards. Some people should do this. They are addicted to debt. They need to go cold turkey.

This advice is specific, not universal. Credit cards are a bad idea generally. Their rates are too high. People are easily sucked in to years of high-interest debt. But this is not an argument against debt. It is an argument against subprime, high-interest debt.

If you pay off your credit card bill every month, the card is not a liability. It can be an emergency tool, such as on the road when your car breaks down. The point is, the card becomes a liability only if you have a problem with debt. You’re the liability, not the card. Don’t confuse cause with effect.

CONCLUSION

Debt and trust go together. President Reagan said of nuclear disarmament, "Trust, but verify." This is good advice. Limit your extension of trust. Limit also your extension of credit.

Don’t ask for too much trust. Limit what you expect. Limit also your debt.

If you can get a 30-year fixed-rate mortgage at a low interest rate, and you really want the home, take the mortgage if you have an expected stream of income to pay it off, such as Social Security. Paying off the mortgage is a good use of a stream of income denominated in dollars. They will depreciate.

The home will appreciate.

www.lewrockwell.com/north/north529.html

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Debt: An Inescapable Concept
Part 3: Business Debt
by Gary North
by Gary North


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Debt is an inescapable concept. It is never a question of debt or no debt. It is always a question of which kind of debt, owed to whom, when.

I have previously covered the related issues of social debt and personal debt. Business debt is different, because a business is not biological. A business survives or perishes ("lives" or "dies") in terms of decisions made by people outside the business: customers.

This can also be said of individuals. We are all dependent on others. Then what are the economic differences between a human being and a business?

First, a business does not have a moral claim on the charity of others, unlike the members of a family. It exists to serve customers. The customers’ hammer over a business is money: the most marketable commodity. A business cannot survive if it does not earn a return on the investments made by owners. So, customers determine the fate of every business.

Second, unlike an individual, a business is not self-conscious. A business is not an acting individual. It is a tool of acting individuals.

Third, it does not produce in order to consume. It produces in order to make a profit from its assets. These profits are either transferred to business owners or reinvested to produce more profits.

Fourth and decisively, a business has no soul. It faces no eternal sanctions.

FIVE WAYS TO FINANCE A BUSINESS

A business has five sources of capital: (1) invested time and/or money from its founders; (2) money from passive investors who purchase part ownership; (3) loans from individuals, banks, or other financial organizations; (4) loans from its customers; (5) reinvested profits. Capital comes from owners, lenders, and customers.

Entrepreneurs have great confidence in their business vision. They prefer not to share ownership.

A small group of outside owners will often attempt to substitute their vision for the entrepreneur’s vision. The organization can take on the characteristics of a committee – a divided committee. Committees are notoriously ineffective as entrepreneurial institutions. It is too difficult to establish the blame for bad decisions. "Success has a hundred fathers, but failure is an orphan."

In contrast, lenders want only a guaranteed rate of return on their money. They do not want to exercise control over the business. They have no legal control over the business. This is ideal for an innovator. As long as the business meets its payment schedule, lenders stay out of management.

This is why debt is the preferred path for founders. Until the business is up and running and growing fast, founders do not want to bring in new owners. Until the business is so successful that so many owners will want to invest that their decision-making authority is diffused and therefore de-fused, the founder does not want to sell shares to the public.

Sometimes, customers are asked to become lenders, although they do not perceive their position as lenders. The best example of this arrangement is a subscription. Subscribers provide money in advance to receive published materials. The owner has an obligation to deliver the subscription, but he surrenders no control to subscribers. They can cancel their subscriptions or fail to renew, but they have no legal authority to tell the publisher’s owner or editor what to write about.

TRANSACTIONS

Prior to 1945, most people bought with cash: coins or currency. They did not have checking accounts. Most businesses were operated in terms of instant transactions. At a retail market, you picked up items you wanted to buy, went to the counter, and paid cash for them. The clerk deposited the money in a cash register. There was very little time or trust involved at the point of sale, other than the customer’s trust in the product’s quality.

Checks take time to clear the banks. In a week, the check clears, and the transaction is over. During this time, the seller extends credit to the buyer. He trusts the buyer.

Credit cards appear to be close to instantaneous. This is deceptive. There are multiple debt and trust relationships involved. The seller’s merchant account (bank) extends credit to him for a transaction fee. If the buyer is using a stolen card, the seller will not lose any money. On the other side of the transaction, the buyer’s bank extends credit to him, which its owners dearly hope he will not pay off soon – not at 10% to 33% per annum.

Debit cards are basically digital currency. There is no credit involved. The money spent is immediately deducted from the buyer’s account.

At a Dollar General store, you can purchase anything with a debit card. You cannot purchase anything with a credit card. The seller saves money by not paying for the credit side of the operation.

So, it is possible to stay in business without debt by insisting on currency or a debit card, but I know of few conventional businesses that operate solely in terms of currency. The illegal drug trade operates with currency only. So do gun shows. But these are not conventional operations.

In business, debt is not quite inescapable, but it is close.

DEBT-TO-EQUITY RATIO

The solvency of businesses, especially publicly traded corporations, are rated in part in terms of their debt to equity ratio.

The simplest concept of equity is the net value of the business if sold for cash. This is established by dividing its net income per year by the rate of interest. A business generating a million dollars a year, net, in an economy where the 10-year interest rate is 5% is worth $20 million.

Money in the bank is considered equity. There are variations of this. Credit in the form of 90-day loans extended to customers is considered close to money in the bank. This money probably earns a higher rate of return than money in a bank. There is a greater risk of default, but when spread over many customers in boom times, this form of credit was considered positive. It is equity.

Debt is legally a liability. It is a legal claim on the stream of income generated by the business. So, these payments reduce the stream of income. They therefore reduce equity.

There was a time when the debt-to-equity ratio was supposed to be low in order to gain a high credit rating. It is not taken nearly so seriously today.

Debt for the expansion of production facilities is considered positive, though not unlimited. Credit rating services look at the internal rate of return on the plant and equipment, and then evaluate the effect of rising debt. It is generally assumed that a growing business with positive cash flow and rising equity could sustain an increase in the debt-to-equity ratio. This is a way to finance expansion, meaning market share. Rising market share allows greater price competition. Wal-Mart is the great example of this process in our era.

The United States in the late nineteenth century ran a balance of payments deficit. Foreign investment flowed in to take advantage of perceived opportunities. Railroads were a major growth area of the economy. So was real estate. The debt was used to expand output, not finance consumption. Consumer debt grew rapidly only in the 1920’s, when the country was running balance of payments surpluses.

Today, debt is used increasingly to finance mergers and acquisitions. Companies buy their competitors. They also buy unrelated businesses as a way to diversify. This is common in boom phases of the economy. When recession hits, the companies sell off their component parts at a loss and return to the core business.

Another major use of debt is to finance stock repurchases from the public. This reduces the supply of shares available for investors. This drives up stock prices. Senior managers, because of American tax law, prefer to be compensated by the use of stock options. Salaries over a million dollars a year may not be deducted from pre-tax corporate expenses.

Management’s performance is commonly measured by stock prices. So, by using corporation money that could have gone for capital expansion, senior management uses it to increase the share price: reduced supply, increasing demand (from the corporation). The top managers are usually in senior management for under ten years, so they must make hay while the sun shines. This policy is hit hard when a recession hits. The company’s share prices fall. Meanwhile, the firm does not own capital to increase market share at the expense of competitors in a down market.

This strategy is used to fend off corporate raiders, who buy up shares to gain control over a firm. Successful raiders then fire existing managers. The managers don’t want this, so they use corporate income to defend their careers.

Corporate debt has risen for a generation in the United States, but consumer debt has risen faster. In the early 1970’s, the ratio of business debt to total debt was in the range of one-third. Today, it is closer to 20%.

Business debt has a much greater chance of being productive than consumer debt. It can be misused. Buying up company shares is surely a misuse of corporate profits in the long run, although it is good for senior managers and short-term holders of the shares. But business debt for expansion still goes on. Consumer debt is present-oriented. It is not spent to increase wealth except in the case of housing debt, which can be used as a way to unload depreciating future dollars onto creditors in exchange for an appreciating asset.

When a company can borrow at 7% in order to earn 10%, debt is a good strategy, depending on the phase of the business cycle. But debt is relentless. It is a ticking meter. It must be serviced in good times and bad.

A company is not a human being. It does not exist to consume. It exists only to produce. Anything that turns it into a means of consumption for its employees threatens its survival in a competitive market, unless the form of consumption – subsidized cafeterias, gyms, and limousines – is a means of retaining employees by offering tax-free compensation.

So, if it were not for the business cycle, it would not matter whether the company raises money by selling new stock, taking on more debt, or retaining more earnings. It is when the downturn comes that it matters. Debt is a legal liability irrespective of the company’s performance. It drains the company’s income in the down phase. A company can cease paying dividends. It cannot cease paying interest.

The policy of the Federal Reserve has been to forestall the liquidation of malinvested capital (recession) by pumping in new fiat money. This has created a false sense of security among business managers. Increasing corporate debt seems to be a better policy than increasing ownership through the issue of new stock. This policy is good for senior managers, who are compensated mainly by stock options. They want less stock available to investors. But in the down phase of the cycle, the policy of a higher debt-to-equity ratio places the company’s survival in jeopardy.

WHEN RECESSION HITS

Investors should look for companies that are surviving the recession, but just barely, due to their high debt-to-equity ratio. When it becomes clear that the FED has begun its policy of reinflating, high-debt companies are better candidates for purchase because of their leverage. Increasing revenues have a more powerful effect in a high debt-to-equity company than a low debt-to-equity company.

The opposite is true in the early phase of a recession. You don’t want to own shares of high debt-to-equity companies in any industry. That’s when steady-Eddie companies are the wise fund manager’s choice. Leverage will kill you in the down phase of the economy.

If the FED would stay out of the capital markets, refusing to buy or sell T-bills or other assets, then the American economy could begin to escape home-brew recessions.

This does not solve the problem of Asian central banks, whose purchases of T-bills can affect interest rates in the United States. By creating a massive inflation-driven boom in China, the Bank of China has created a situation in which the boom-bust cycle spreads from China to its trading partners. By making capital available to Western consumers, China’s central bank has fanned the West’s consumer boom. Americans take advantage of the bargains, while Chinese workers do without. This is mercantilism, and it leads to misallocated capital. It is now an international phenomenon.

CONCLUSION

Debt has legitimate uses in business. It allows senior managers to finance their companies without having to retain earnings or issue more shares of stock. But when tax laws favor capital gains (lower rates) and also punish companies that pay senior managers over a million dollars a year, fiscal policy skews investment in favor of debt to fund stock repurchases. The debt/equity ratio increases, leaving companies far more vulnerable to recessions.

This in turn calls forth the Federal Reserve, which once again stimulates the economy through money creation and lowering short-term interest rates. This leads to a steady-Eddie depreciation of the dollar.

Price inflation harms creditors and benefits debtors. The taxing policies and central bank policies of the United States favor the long-term destruction of the dollar.

May 16, 2007

www.lewrockwell.com/north/north530.html

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Debt: An Inescapable Concept
Part 4: Government Debt
by Gary North
by Gary North


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Debt is an inescapable concept. It is never a question of debt or no debt. It is always a question of which kind of debt, owed to whom, when.

In theory, civil governments do not need to issue debt. Yet they do, century after century. In the history of the United States, the national government was debt-free only in 1835, in the midst of an economic boom during the second term of the presidency of Andrew Jackson, who had campaigned on a platform of reducing government debt. He fulfilled his promise. He even went beyond his promise. He also refused to re-charter the Second Bank of the United States, which lost its monopolistic Federal charter in 1836. It went bankrupt five years later, unable to compete in a free market.

Governments in the West have been going heavily into debt ever since the fifteenth century, beginning with the Italian city-states. They have worked hand in hand with government-licensed fractional reserve banks, which then buy the debt instruments of the governments. Eventually, all of the governments of the Italian city-states defaulted, taking down the banks with them.

Governments see that they can gain political support from the rich when they owe great sums of money to the rich. The rich in turn regard governments as solvent borrowers because governments possess the power to tax. Investors assume that governments will not default because governments do not have to face a competitive market. Investors believe that the power to tax is more reliable than market competition. They buy government bonds in preference to corporate bonds.

This assumption holds good for most periods. But when it doesn’t hold good, investors lose everything. In times of war, governments build up debt. In times of peace, they are supposed to reduce the level of debt. But in the twentieth century, governments did not reduce debt in peacetime, while accelerating it in wartime.

The modern world is a world built on government debt. Government debt is the economic foundation for the central banks of the world. Government debt in the coffers of central banks establishes the legal reserves for fractional reserve commercial banks. When debt becomes the legal basis of money, there can be no reduction of debt without universal bankruptcy: massive deflation. No government is willing to accept this outcome. This is the great curse of modern banking. The world has marched into a lobster trap.

THE LOBSTER TRAP

A lobster trap is an ingenious device. A lobster enters the trap in search of some alluring goodie to eat. The trap is a one-way device. The further into the trap the lobster pushes, the tighter it gets. It cannot back out, so it pushes forward, on the assumption that relief lies ahead. In fact, complete entrapment lies ahead.

This is how government debt works. Those who lend to the government see that the debt is not going to be repaid. The modern theory of government explicitly states that government debt should not be repaid. So does the modern theory of debt-based money. There is no income-producing sinking fund that will enable the government to reduce its debt. No matter how large the debt moves along its one-way street, there are investors who think they will be paid interest. They will then roll over the debt when it matures.

So great is men’s confidence in the power of government coercion to produce rabbits out of fiscal hats that investors continue to buy the debt. They recognize that corporations can become so indebted that they are at risk of default. They do not often recognize this with respect to national governments.

There are debt-rating services that make public assessments of the credit-worthiness of corporations and governments. But they rarely announce that a national government is on the verge of default. This is because national governments do not openly default. Instead, a national government turns to the nation’s central bank to buy its debt, and the central bank does so, inflating the money supply, thereby lowering the market value of the bonds. The default is indirect.

The ultimate debt lobster is therefore the central banking system. National central banks buy bonds with money they create, to be held as legal reserves for the nation’s commercial banks to use in the multiplying of accounts. Central bankers do not invest their own money. They invest money which their own institutions create. They want the interest received to be worth something, but their primary goal is to avoid seeing these bonds redeemed by the government. They hold government bonds as their main source of revenue. Modern monetary and tax theory agree: governments need not and should not repay debt.

PROMISES AS BONDS

"A man’s word is his bond." This is an ancient and once-familiar slogan in the United States. A bond is a relationship initiated by trust in someone’s promise to fulfill an obligation. This is what a debt is.

The politicians in Washington have sold far more bonds of this kind than there are T-bills and T-bonds in existence. The official on-budget debt of the United States, which does not count Social Security and Medicare, is in the range of $9 trillion. You can monitor this on one of the debt clocks that are on the Web.

The cost of the long-run promises made by politicians and signed into law cannot be calculated directly. This is an advantage for the politicians. The national government’s main promises in the United States are these: Medicare, Social Security, other Federal pensions, the ERISA private pension default insurance fund, the legally implied future bailout of banks and savings & loans (which cost the government hundreds of billions of dollars in the late 1980’s), and mortgage-issuing non-government agencies: Fannie Mae and Freddy Mac.

Medicare and Social Security are legal liabilities, but it is not clear what their magnitude is. This depends on statistical assumptions regarding birthrates, personal health, price inflation, average lifespans, medical costs, immigration rates, and numerous other factors. Of course, the crucial assumption does not appear in the statistical summaries produced by the Social Security Trust Fund. That assumption is that future taxpayers will abide by prior legislation guaranteeing payments to retirees.

The most frightening estimates place the unfunded liability of Medicare and Social Security combined above $70 trillion.

Because the Trust Funds are filled with nothing but non-marketable U.S. government bonds, there are no funded liabilities at all. So, who will pay off these debts? The official answer is "the government of the United States." But that is a legal entity which has existence only insofar as it can tax, borrow, or create fiat money through the Federal Reserve System.

Every other Western industrial nation is in a similar situation. None of them has taken steps to use tax revenue to invest in productive capital that will be used to pay future beneficiaries. The entire Western economy is awash in debt – not just on-budget debt with specific payment dates, but open-ended debt that is based on yesterday’s promises and today’s reassurances.

WHEN PROMISES ARE BROKEN

A bankrupt corporation may or may not revive. Its shareholders are ruined. They bear the brunt of the loss. Creditors also suffer major losses.

A bankrupt nation has no creditors who can demand payment if the nation’s courts do not grant relief to creditors. The bankrupt nation runs the court system.

So, the bankruptcy only rarely results in the permanent demise of the government. The USSR did disappear, but there is nothing to match this in human history. A giant empire simply folded without bloodshed. It was a smart move for the Russian bureaucrats. Today, instead of being $60 billion in debt to the West, as it was in 1991, it has $350+ billion in foreign reserves, thanks to income from oil and gas sales. It is third internationally behind Japan and Communist China in official reserves.

The promises of dead politicians do not cause problems for the deceased. They do cause immense problems for politicians who reassured older voters that the government would never default on its obligations. They also cause immense problems for all those oldsters who trusted the official reassurances.

DEFAULT THROUGH INFLATION

Incumbent politicians do not want default to occur while their careers are still at stake. So, they seek ways to postpone default. In the case of retirement programs, they increase the age limit at which benefits begin. This violates the promise of earlier politicians, but because this is piecemeal default, there is no well-organized opposition. This has already happened to Social Security.

Another way to default is to impose a means test. If you have an income above a specific level, you must pay more into the system in premiums or receive less in return. This policy has begun this year with Medicare.

At some point, piecemeal default becomes politically risky. The opposition party, on the outside, will hold incumbents’ feet to the fire. "Vote for us if you want your promised money." This brings the economically unsustainable promises into prominence.

The point is, current budgets are hard political realities. They are not promises. They are immediate liabilities. The politicians cannot announce, "Let them eat promises."

The least controversial way to default is to create money to send to the beneficiaries, as promised. The central bank can do this easily enough. It buys the government’s debts. This provides money for the government to send checks to beneficiaries.

One result is rising prices. This unwanted result can be blamed on speculators or on greedy businessmen. The public is unfamiliar with economic theory. Voters are ready to accept the official explanations. They do not monitor central bank statistics.

When default takes place through monetary inflation, default affects not just the government’s budget. It affects every debt-credit relationship. Investors in corporate bonds see their rate of real return fall. The same is true of investors in mortgages.

As prices increase, long-term interest rates rise. Lenders demand an inflation protection premium in their promised interest rate. Borrowers see that price inflation will enable them to pay off with a cheaper currency unit, so they agree to the higher rate of interest.

As long-term rates rise, the present market value of existing long-term promises falls. This has negative effects in the capital markets.

So, default through monetary inflation has negative effects outside the government promises market. If continued, this policy becomes default through the destruction of currency. It becomes universal.

MACROECONOMIC DEFAULT

When sons default on their implied social contracts by refusing to support aged parents, this is microeconomic default. It happens, of course, but the practice is not widespread. Social pressures against such default are applied to those who break these unofficial contracts.

The parents usually have warnings in advance. Sons may not be reliable. They may not be productive. Parents can search for other agents to accept the role of "reliable sons." They can transfer the inheritance to these new agents. They can buy an annuity from an insurance company. They can go to other relatives and create a trust where the trustee will direct the inheritance to those who support the aging parents.

In other words, there are ways to reallocate responsibility when the government is not the promisor. But when the state has issued promises and then taxes workers to fund the government’s promises, the ability of the dependents to find alternative arrangements falls dramatically. No one outside the government except expensive tax lawyers and tax professionals can find ways to reallocate the risk of default. The default then becomes macroeconomic. It applies to everyone in the economy who pays taxes or receives the promised tax benefits.

This is the situation which Western taxpayers and oldsters are facing over the next two decades. Economist Ludwig von Mises was once asked what his inflation hedge was. He had a one-word answer: "Age." It paid off. He died in 1973, before the decade’s inflation had done its corrosive work.

The free market decentralizes defaults of all kinds. A few people are harmed. This sends signals to others to pay closer attention to the details relating to the default. There is strong economic incentive to find solutions to the problem.

In contrast, when a government defaults, the default is centralized. The default affects people throughout the society. The grand experiment fails in full public view. Government agents then blame others. There is no quest for cause and effect, for such a quest must eventually identify the culprit: the state. The state’s agents do not want this. Neither do most of the victims.

Most voters do not want to admit that they were sucked into voting for a doomed program of coercive wealth redistribution. That would call into question their morals as well as their wisdom in trusting elected thieves and liars. This would make them unidicted co-conspirators. They resist such a suggestion. They do not want a thorough investigation of failed government programs generally, let alone one in which they became victims – first as taxpayers, then as dependent recipients of tax revenues.

So, unlike private defaults, not only is the default universal, it is not self-correcting. Like investors in Latin American bonds since the 1820’s, voters return again and again to be sheared. They refuse to accept this lesson of history:

"Government promises are not safe to trust long-term."

In rare and extreme cases, the public does identify the culprit. This can lead to a political revolution. The most famous is the French Revolution, which took place because Louis XVI could no longer pay his debts in 1789. He had to call the long-dormant Estates General into session to approve new taxes. Newly elected lawyers then took over the government and created a far more oppressive system of default through inflation. They confiscated church property and then issued bonds against this property. These bonds became the country’s currency.

When the reign of the lawyers failed, there was another revolution. Napoleon was the winner, but only until 1815. Again and again since then, political revolutions have replaced bankrupt regimes. Inflation has marked the rise and fall of these regimes.

CONCLUSION

Western industrial countries became enamored of government promises in the twentieth century. These regimes issued promises to the working population. The government promised to tax future generations if existing generations would just consent to mild taxes today. The result is familiar. The outcome is reported in I Kings 12, the story of King Rehoboam’s tax increases in Israel.

And he said unto them, What counsel give ye that we may answer this people, who have spoken to me, saying, Make the yoke which thy father did put upon us lighter? And the young men that were grown up with him spake unto him, saying, Thus shalt thou speak unto this people that spake unto thee, saying, Thy father made our yoke heavy, but make thou it lighter unto us; thus shalt thou say unto them, My little finger shall be thicker than my father’s loins. And now whereas my father did lade you with a heavy yoke, I will add to your yoke: my father hath chastised you with whips, but I will chastise you with scorpions (1 Kings 12:9–11).

The result was a successful political revolt. The ten northern tribes separated from the king’s rule.

Political rulers never seem to learn this lesson. Neither do their counsellors. But in today’s world, the victims – taxpayers – are also very slow to learn this lesson. They wind up stung by scorpions.

There will be a tax revolt at some point. There always is. But the damage to the economy between now and then will be substantial. The school of hard knocks imposes high tuition.

May 17, 2007

www.lewrockwell.com/north/north531.html

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Debt: An Inescapable Concept
Part 5: Central Banking
by Gary North
by Gary North


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Debt is an inescapable concept. It is never a question of debt or no debt. It is always a question of which kind of debt, owed to whom, when.

The modern economy is addicted to government debt by way of central banking debt. The system is self-reinforcing. Governments spend more money and make more unfunded promises than taxes can fund. So, governments turn to debt as a way to make up the shortfall. To keep interest rates low, governments license privately owned central banks to create money in order to buy government debt. This has been the pattern ever since the creation of the Bank of England in 1694.

Central banks create money when they purchase government debt, which is mainly what they invest in. This adds new money to the economy: monetary inflation. To eliminate all government debt, as the United States did in only one year, 1835, the central bank would have to sell government debt and purchase some other asset to replace it. Otherwise, the bank’s sale of government debt to the public or to the government (debt reduction) would shrink the money supply.

For a central bank to fold up shop and go away, it would have to sell all of its assets. This would create price deflation on a massive scale. It would create a depression far worse than the Great Depression of the 1930’s. This is why, once begun, the central banking system is self-reinforcing. It is like an addictive drug. It means lifetime employment for the pushers: central bankers.

The modern system of debt-based money is therefore as close to politically inescapable as anything in the modern world – even the welfare state. The modern world is addicted to central bank debt. In theory, central bank debt is not inescapable. Once begun, however, it is politically inescapable. The organization of debt into money is politically irreversible short of what Ludwig von Mises called the crack-up boom: the breakdown of money in mass inflation. It leads to ever-greater monetary inflation.

This is a worldwide phenomenon. Around the world, central banks control national monetary systems. A free market in money is universally opposed by politicians, academics, and of course commercial bankers, who want a lender of last resort to protect them from bank runs by their depositors.

DEBT WITHOUT END

The United States government is the largest debtor in history. From all over the world, but especially from Asia, money is flowing in to buy Treasury debt. This money is from central banks, mainly – money created by government-licensed counterfeiting operations.

If this money were going into the U.S. stock market, Americans would at least be the beneficiaries of better tools of production. They would not be laying up wealth in their old age. Instead, foreign central banks would be doing that: establishing ownership of wealth-producing assets. But central bankers are not investing their own money or depositors’ money. They are investing recently counterfeited money. They buy government promises to pay. It is a gigantic con job between government-licensed counterfeiters and elected liars who know the debts will never be paid off.

You and I are caught in the middle.

Here is how the system works. Foreign central bank-produced counterfeit money is used by foreign central banks to buy Federal Reserve-produced counterfeit money, which is then used to buy a large chunk of the U.S. government’s debt. No one expects the debt to be paid off. All that anyone expects is interest payments.

The #1 principle of national government debt is this: "Old debt must be rolled over, not repaid." The idea that national government debt must ever be repaid is considered ludicrous – by bankers, voters, politicians, and academic economists. This assumption lies at the heart of the modern political order. We have bet the political order on this assumption. It is a false assumption. As King David wrote 3,000 years ago: "The wicked borroweth, and payeth not again" (Psalm 37:21a).

What is legitimate in one realm – private debt – is not legitimate in another realm: government debt. Private debt gets paid off by individual debtors. Government debt is perpetual.

Let me explain the logic of the two realms. First, debt is correctly seen as the engine of wealth creation in the private markets, which it can be when it is used to purchase tools of production. Second, debt is also regarded as the engine of prosperity in private markets when it is used to purchase consumer goods. This position is much less defendable than the first, but if consumers want to do this, there is nothing morally wrong, so long as they repay the debt.

Then the defense of productive debt in private markets is applied to the government. Here, the logic of debt breaks down. Would you loan money to a known counterfeiter? Only if the counterfeiter is the government. To lend money to a counterfeiter is to guarantee repayment in depreciating currency.

The fact is, the modern economy is based on money lent to a debtor who is in league with the largest counterfeiter on earth: the Federal Reserve System. These days, the FED is not cranking the digital printing press at a high rate to buy U.S. government debt. This is because other counterfeiters are doing it for the FED. The Bank of China is producing fiat money at a rate above 15% per annum. It is then taking billions of dollars worth of this newly created money to buy the debts of its trading partners’ governments, including the United States.

The world’s economy runs on officially counterfeit money. Technological innovation is accelerating worldwide, but this innovation does not require counterfeit money. Hundreds of millions of Chinese and Indians are moving off the once collectivized farms and heading for cities. They are moving out of the world of 1950’s-era socialism. This is highly productive for them and for consumers all over the world, but it did not require counterfeit money to make possible this transition. It required only a reduction of government control over the economy.

Asian central bankers are well aware that the U.S. government has no intention to pay off its debt. They also know that the Federal Reserve System stands ready to fund the U.S. government’s budget by creating fiat money. But Asian bankers seem not to care. Why should they? They are buying this debt with fiat money. They buy dollars. They then buy T-bills. This money is then spent by the U.S. government. The recipients of the U.S. government’s money then buy Asian currencies to buy Asian products. This helps the Asian economies to grow.

But couldn’t the Asian central bankers just buy the government debt of their own nations? Couldn’t they eliminate the middlemen, namely, the U.S. government and U.S. consumers? Of course they could. But we are still living in a world of mercantilist economics. It is as if Adam Smith’s Wealth of Nations had never been written. In the world of Asian central banking and politics, mercantilist economics rules supreme. The way to wealth, they believe, is by letting foreign governments run up huge debts that will never be repaid in order for foreigners to buy consumer goods exported from Asia.

You may think: "Wait a minute. This means giving away valuable consumer goods to foreigners today as a way to get rich in future depreciated money. This is nutty." If so, you have obviously been influenced by the logic of the free market. Asian policy-makers haven’t.

While the world is getting rich through the efforts of inventors, entrepreneurs, savers, and day laborers who are not part of governments, it is operated in terms of digits – counterfeit money – that are controlled by an alliance of national politicians and private central bankers. These digits keep multiplying, and every one of them represents a debt.

Money today is based on debt. To repay this debt would require a massive contraction of money back to gold and silver. This process would create a massive depression. So, government debts are not intended to be repaid.

"The wicked borroweth, and payeth not again."

But to keep the game going, there must be the illusion of repayment. There must be debt rollovers. There must be prompt payment of interest. There must be official solvency.

In short, there must be widespread acceptance of an illusion.

WHEN THE DEBTOR CONTROLS THE CURRENCY

Governments deal in illusion. This is their two-fold specialty: illusion and force.

Individuals monitor their own level of debt. They are careful not to let their debt load get beyond their ability to repay. They do not let themselves get into a position of having to default. They know that bankruptcy is a painful option. They know that creditors can repossess every mortgaged item they own. This is why the household debt payment/disposable income ratio has risen very slowly since 1980.

In contrast is the United States government. It keeps rolling up massive debts, year by year. It has on on-budget debt of almost $9 trillion, plus an off-budget debt in the range of $70 trillion.

There is no way that this can be paid off with money that possesses today’s purchasing power unless political steps are taken today to stop the expansion of debt. But no such steps are ever taken. Politicians have no incentive to stop making promises. The unfunded liability keeps growing.

Because nobody can foreclose on the U.S. government, politicians have no incentive to create a schedule for repaying the government’s debt. They would be thrown out of office if they suggested that the expansion of future obligations must cease until a means of repayment is set up. Remember the rule:

"Old debt must be rolled over, not repaid."

The illusion of repayment must be maintained. It will be maintained, nation by nation, all over the world. It will be maintained by the creation of more counterfeit money. Your check will be in the mail – or deposited directly into your account. You will get paid. Have no fear.

The illusion of solvency of the government will be maintained by the insolvency of the currency.

In the Soviet Union, there was a common saying among the workers: "The government pretends to pay us, and we pretend to work." The result was the nation’s bankruptcy in 1991. The USSR could no longer service its debt of about $60 billion to the West. Today, Russia’s central bank has something in the range of $350 billion in IOU’s from Western governments. That’s what oil and natural gas can do for a government.

Russia’s central bankers are now caught in the absurdity of mercantilist economics. The government has sold off Russia’s energy assets in exchange for Western governments’ promise to pay counterfeit money. Dumb.

And so it goes, nation by nation. The politicians and central bankers finance the sale of valuable present goods in exchange for promises to pay counterfeit money years in the future.

How will all this end? Poorly. In what form? There are various possible scenarios.

When there is an interbank payments crisis – gridlock – due to an unforeseen event, such as an airborne anthrax attack on New York City or London or both.
When the government’s bills come due and tax revenues don’t.
When interest rates soar, causing a depression and widespread private bankruptcies.
When mass inflation depreciates the major nations’ currency systems.
When old people cannot survive on the income they have been promised, and must return to their children’s households for relief.
The international currency system is based on two primary factors: (1) central banks’ counterfeiting operations; (2) debt-based money. The first guarantees long-term price inflation: debt servicing with depreciating money. The second prevents any long-term reduction of government debt that serves as central bank reserves, i.e., monetary deflation. This is a ratchet upward in the government debt markets of the world.

DEBTORS AND CREDITORS

We are all debtors. We are all creditors. The political question is: Which way will we vote? As debtors or creditors?

I think most voters vote as debtors. They feel the pressure of debt right now. They do not think of themselves as long-term creditors: pensioners, Social Security members, future Medicare recipients. In a choice between a little inflation vs. deflation (personal bankruptcy), they will choose inflation. They want to be able to meet their monthly payments, even if this means accepting long-term depreciating money. They fear next month more than they fear age 65.

One way to defend yourself against depreciating money is by accepting long-term debt. Consider your mortgage. Depending on your age, you probably still owe money for the home you live in. If you sell it, you will probably buy another one. You will use debt to purchase it. If you buy a nicer home, you will owe more on it than you owe on the one you are living in now.

You may have made a decision to spend your life in debt. Tens of millions of people do. I know I have. I am not a net debtor, but I plan always to have a mortgage. Why? Because I do not trust the U.S. dollar. I am a creditor: Social Security. I have been promised a lifetime of income in dollars. I want to be able to do something useful with these dollars. Paying off a fixed-interest mortgage is something useful.

In other words, I have seen that I am both a creditor and a debtor. I would like to break even on the deal. A fixed-rate mortgage should allow me to do better than break even. Of course, I will be a lifetime net loser. I paid into a retirement system that is a gigantic chain letter. I would be far better off today if I had invested the money that I paid into Social Security. But what’s gone is gone. I must make my decision today based on conditions today. I think I will be better off using my Social Security income to pay off a mortgage.

There are people my age or older who own their homes debt-free. These people grew up in a different generation from those starting families today. They either remember the Great Depression, as my parents do, or they grew up in households run by people who remember it, as I did. They know the stories of families that were evicted from their homes for non-payment of their mortgages. They may even know the true horror stories: families that were evicted from their farms for non-payment, yet who simultaneously lost everything they had in the bank when the local bank went bankrupt. They were wiped out as debtors, and they were also wiped out as creditors. These people learned that debt can be destructive. They decided early to avoid all but mortgage debt, and to pay off their mortgages rapidly.

They learned the wrong lesson. They should have bought one or two rental houses per year, using debt. They would now own 40 to 80 homes, mostly debt-free, each worth $250,000. They did not recognize that a new era had dawned after 1940: an era of irreversible price inflation. They did not buy appreciating assets using borrowed money.

CONCLUSION

Like addicts, we are trapped in the modern debt-based economy. Every institution is part of this web of debt. Some debt is productive. Government debt is unproductive. Central bank debt is addictive.

With governments and central banks in charge of money, monetary inflation is inevitable. This would not be true in a free market for money, where banks would not be allowed to violate contracts with their depositors and suspend payment in gold or silver coins.

We therefore seek ways to protect ourselves against the guaranteed inflation of central banking. Yet the obvious way to protect ourselves from depreciating money is to take on long-term, fixed-rate debt. This is why the organization of debt into money is self-reinforcing. The individual’s best defense – long-term debt – extends the central banking system.

In 1949, Ludwig von Mises identified the end result of the policy of central banking: mass inflation. Prices rise, and this gets built into the economy’s long-term contracts: a price premium. He wrote:

It is necessary to realize that the price premium is the outgrowth of speculations anticipating changes in the money relation. What induces it, in the case of the expectation that an inflationary trend will keep on going, is already the first sign of that phenomenon which later, when it becomes general, is called "flight into real values" and finally produces the crack-up boom and the crash of the monetary system concerned.

The destruction of purchasing power through monetary inflation, as well as the boom-bust cycle, is the product of the government-central bank alliance. There is no pain-free way out of the addiction to fiat money. This is why neither politicians nor central bankers have any intention of paying off the national debt. They see debt as forever.

I do not. Debts can be paid off through mass inflation. I think this is the way they will be paid off. Conclusion: don’t be a long-term creditor for very long.

May 18, 2007


www.lewrockwell.com/north/north532.html



Martin Luther King preaches against war
A speech originally directed against the war in Vietnam, as relevant today as ever, now remixed over a hiphop beat and photos of today's Bush administration.
Video remixed by Eric Blumrich www.ericblumrich.com
www.mlkonline.net/video-mar...i-war.html


Beyond Vietnam: A Time to Break Silence
By Rev. Martin Luther King
4 April 1967
Speech delivered by Dr. Martin Luther King, Jr., on April 4, 1967, at a meeting of Clergy and Laity Concerned at Riverside Church in New York City
[Please put links to this speech on your respective web sites and if possible, place the text itself there. This is the least well known of Dr. King's speeches among the masses, and it needs to be read by all]
www.ssc.msu.edu/~sw/mlk/brkslnc.htm
________________________________________
I come to this magnificent house of worship tonight because my conscience leaves me no other choice. I join with you in this meeting because I am in deepest agreement with the aims and work of the organization which has brought us together: Clergy and Laymen Concerned about Vietnam. The recent statement of your executive committee are the sentiments of my own heart and I found myself in full accord when I read its opening lines: "A time comes when silence is betrayal." That time has come for us in relation to Vietnam.
The truth of these words is beyond doubt but the mission to which they call us is a most difficult one. Even when pressed by the demands of inner truth, men do not easily assume the task of opposing their government's policy, especially in time of war. Nor does the human spirit move without great difficulty against all the apathy of conformist thought within one's own bosom and in the surrounding world. Moreover when the issues at hand seem as perplexed as they often do in the case of this dreadful conflict we are always on the verge of being mesmerized by uncertainty; but we must move on.
Some of us who have already begun to break the silence of the night have found that the calling to speak is often a vocation of agony, but we must speak. We must speak with all the humility that is appropriate to our limited vision, but we must speak. And we must rejoice as well, for surely this is the first time in our nation's history that a significant number of its religious leaders have chosen to move beyond the prophesying of smooth patriotism to the high grounds of a firm dissent based upon the mandates of conscience and the reading of history. Perhaps a new spirit is rising among us. If it is, let us trace its movement well and pray that our own inner being may be sensitive to its guidance, for we are deeply in need of a new way beyond the darkness that seems so close around us.
Over the past two years, as I have moved to break the betrayal of my own silences and to speak from the burnings of my own heart, as I have called for radical departures from the destruction of Vietnam, many persons have questioned me about the wisdom of my path. At the heart of their concerns this query has often loomed large and loud: Why are you speaking about war, Dr. King? Why are you joining the voices of dissent? Peace and civil rights don't mix, they say. Aren't you hurting the cause of your people, they ask? And when I hear them, though I often understand the source of their concern, I am nevertheless greatly saddened, for such questions mean that the inquirers have not really known me, my commitment or my calling. Indeed, their questions suggest that they do not know the world in which they live.
In the light of such tragic misunderstandings, I deem it of signal importance to try to state clearly, and I trust concisely, why I believe that the path from Dexter Avenue Baptist Church -- the church in Montgomery, Alabama, where I began my pastorate -- leads clearly to this sanctuary tonight.
I come to this platform tonight to make a passionate plea to my beloved nation. This speech is not addressed to Hanoi or to the National Liberation Front. It is not addressed to China or to Russia.
Nor is it an attempt to overlook the ambiguity of the total situation and the need for a collective solution to the tragedy of Vietnam. Neither is it an attempt to make North Vietnam or the National Liberation Front paragons of virtue, nor to overlook the role they can play in a successful resolution of the problem. While they both may have justifiable reason to be suspicious of the good faith of the United States, life and history give eloquent testimony to the fact that conflicts are never resolved without trustful give and take on both sides.
Tonight, however, I wish not to speak with Hanoi and the NLF, but rather to my fellow Americans, who, with me, bear the greatest responsibility in ending a conflict that has exacted a heavy price on both continents.
The Importance of Vietnam
Since I am a preacher by trade, I suppose it is not surprising that I have seven major reasons for bringing Vietnam into the field of my moral vision. There is at the outset a very obvious and almost facile connection between the war in Vietnam and the struggle I, and others, have been waging in America. A few years ago there was a shining moment in that struggle. It seemed as if there was a real promise of hope for the poor -- both black and white -- through the poverty program. There were experiments, hopes, new beginnings. Then came the buildup in Vietnam and I watched the program broken and eviscerated as if it were some idle political plaything of a society gone mad on war, and I knew that America would never invest the necessary funds or energies in rehabilitation of its poor so long as adventures like Vietnam continued to draw men and skills and money like some demonic destructive suction tube. So I was increasingly compelled to see the war as an enemy of the poor and to attack it as such.
Perhaps the more tragic recognition of reality took place when it became clear to me that the war was doing far more than devastating the hopes of the poor at home. It was sending their sons and their brothers and their husbands to fight and to die in extraordinarily high proportions relative to the rest of the population. We were taking the black young men who had been crippled by our society and sending them eight thousand miles away to guarantee liberties in Southeast Asia which they had not found in southwest Georgia and East Harlem. So we have been repeatedly faced with the cruel irony of watching Negro and white boys on TV screens as they kill and die together for a nation that has been unable to seat them together in the same schools. So we watch them in brutal solidarity burning the huts of a poor village, but we realize that they would never live on the same block in Detroit. I could not be silent in the face of such cruel manipulation of the poor.
My third reason moves to an even deeper level of awareness, for it grows out of my experience in the ghettoes of the North over the last three years -- especially the last three summers. As I have walked among the desperate, rejected and angry young men I have told them that Molotov cocktails and rifles would not solve their problems. I have tried to offer them my deepest compassion while maintaining my conviction that social change comes most meaningfully through nonviolent action. But they asked -- and rightly so -- what about Vietnam? They asked if our own nation wasn't using massive doses of violence to solve its problems, to bring about the changes it wanted. Their questions hit home, and I knew that I could never again raise my voice against the violence of the oppressed in the ghettos without having first spoken clearly to the greatest purveyor of violence in the world today -- my own government. For the sake of those boys, for the sake of this government, for the sake of hundreds of thousands trembling under our violence, I cannot be silent.
For those who ask the question, "Aren't you a civil rights leader?" and thereby mean to exclude me from the movement for peace, I have this further answer. In 1957 when a group of us formed the Southern Christian Leadership Conference, we chose as our motto: "To save the soul of America." We were convinced that we could not limit our vision to certain rights for black people, but instead affirmed the conviction that America would never be free or saved from itself unless the descendants of its slaves were loosed completely from the shackles they still wear. In a way we were agreeing with Langston Hughes, that black bard of Harlem, who had written earlier:
O, yes,
I say it plain,
America never was America to me,
And yet I swear this oath--
America will be!
Now, it should be incandescently clear that no one who has any concern for the integrity and life of America today can ignore the present war. If America's soul becomes totally poisoned, part of the autopsy must read Vietnam. It can never be saved so long as it destroys the deepest hopes of men the world over. So it is that those of us who are yet determined that America will be are led down the path of protest and dissent, working for the health of our land.
As if the weight of such a commitment to the life and health of America were not enough, another burden of responsibility was placed upon me in 1964; and I cannot forget that the Nobel Prize for Peace was also a commission -- a commission to work harder than I had ever worked before for "the brotherhood of man." This is a calling that takes me beyond national allegiances, but even if it were not present I would yet have to live with the meaning of my commitment to the ministry of Jesus Christ. To me the relationship of this ministry to the making of peace is so obvious that I sometimes marvel at those who ask me why I am speaking against the war. Could it be that they do not know that the good news was meant for all men -- for Communist and capitalist, for their children and ours, for black and for white, for revolutionary and conservative? Have they forgotten that my ministry is in obedience to the one who loved his enemies so fully that he died for them? What then can I say to the "Vietcong" or to Castro or to Mao as a faithful minister of this one? Can I threaten them with death or must I not share with them my life?
Finally, as I try to delineate for you and for myself the road that leads from Montgomery to this place I would have offered all that was most valid if I simply said that I must be true to my conviction that I share with all men the calling to be a son of the living God. Beyond the calling of race or nation or creed is this vocation of sonship and brotherhood, and because I believe that the Father is deeply concerned especially for his suffering and helpless and outcast children, I come tonight to speak for them.
This I believe to be the privilege and the burden of all of us who deem ourselves bound by allegiances and loyalties which are broader and deeper than nationalism and which go beyond our nation's self-defined goals and positions. We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy, for no document from human hands can make these humans any less our brothers.
Strange Liberators
And as I ponder the madness of Vietnam and search within myself for ways to understand and respond to compassion my mind goes constantly to the people of that peninsula. I speak now not of the soldiers of each side, not of the junta in Saigon, but simply of the people who have been living under the curse of war for almost three continuous decades now. I think of them too because it is clear to me that there will be no meaningful solution there until some attempt is made to know them and hear their broken cries.
They must see Americans as strange liberators. The Vietnamese people proclaimed their own independence in 1945 after a combined French and Japanese occupation, and before the Communist revolution in China. They were led by Ho Chi Minh. Even though they quoted the American Declaration of Independence in their own document of freedom, we refused to recognize them. Instead, we decided to support France in its reconquest of her former colony.
Our government felt then that the Vietnamese people were not "ready" for independence, and we again fell victim to the deadly Western arrogance that has poisoned the international atmosphere for so long. With that tragic decision we rejected a revolutionary government seeking self-determination, and a government that had been established not by China (for whom the Vietnamese have no great love) but by clearly indigenous forces that included some Communists. For the peasants this new government meant real land reform, one of the most important needs in their lives.
For nine years following 1945 we denied the people of Vietnam the right of independence. For nine years we vigorously supported the French in their abortive effort to recolonize Vietnam.
Before the end of the war we were meeting eighty percent of the French war costs. Even before the French were defeated at Dien Bien Phu, they began to despair of the reckless action, but we did not. We encouraged them with our huge financial and military supplies to continue the war even after they had lost the will. Soon we would be paying almost the full costs of this tragic attempt at recolonization.
After the French were defeated it looked as if independence and land reform would come again through the Geneva agreements. But instead there came the United States, determined that Ho should not unify the temporarily divided nation, and the peasants watched again as we supported one of the most vicious modern dictators -- our chosen man, Premier Diem. The peasants watched and cringed as Diem ruthlessly routed out all opposition, supported their extortionist landlords and refused even to discuss reunification with the north. The peasants watched as all this was presided over by U.S. influence and then by increasing numbers of U.S. troops who came to help quell the insurgency that Diem's methods had aroused. When Diem was overthrown they may have been happy, but the long line of military dictatorships seemed to offer no real change -- especially in terms of their need for land and peace.
The only change came from America as we increased our troop commitments in support of governments which were singularly corrupt, inept and without popular support. All the while the people read our leaflets and received regular promises of peace and democracy -- and land reform. Now they languish under our bombs and consider us -- not their fellow Vietnamese --the real enemy. They move sadly and apathetically as we herd them off the land of their fathers into concentration camps where minimal social needs are rarely met. They know they must move or be destroyed by our bombs. So they go -- primarily women and children and the aged.
They watch as we poison their water, as we kill a million acres of their crops. They must weep as the bulldozers roar through their areas preparing to destroy the precious trees. They wander into the hospitals, with at least twenty casualties from American firepower for one "Vietcong"-inflicted injury. So far we may have killed a million of them -- mostly children. They wander into the towns and see thousands of the children, homeless, without clothes, running in packs on the streets like animals. They see the children, degraded by our soldiers as they beg for food. They see the children selling their sisters to our soldiers, soliciting for their mothers.
What do the peasants think as we ally ourselves with the landlords and as we refuse to put any action into our many words concerning land reform? What do they think as we test our latest weapons on them, just as the Germans tested out new medicine and new tortures in the concentration camps of Europe? Where are the roots of the independent Vietnam we claim to be building? Is it among these voiceless ones?
We have destroyed their two most cherished institutions: the family and the village. We have destroyed their land and their crops. We have cooperated in the crushing of the nation's only non-Communist revolutionary political force -- the unified Buddhist church. We have supported the enemies of the peasants of Saigon. We have corrupted their women and children and killed their men. What liberators?
Now there is little left to build on -- save bitterness. Soon the only solid physical foundations remaining will be found at our military bases and in the concrete of the concentration camps we call fortified hamlets. The peasants may well wonder if we plan to build our new Vietnam on such grounds as these? Could we blame them for such thoughts? We must speak for them and raise the questions they cannot raise. These too are our brothers.
Perhaps the more difficult but no less necessary task is to speak for those who have been designated as our enemies. What of the National Liberation Front -- that strangely anonymous group we call VC or Communists? What must they think of us in America when they realize that we permitted the repression and cruelty of Diem which helped to bring them into being as a resistance group in the south? What do they think of our condoning the violence which led to their own taking up of arms? How can they believe in our integrity when now we speak of "aggression from the north" as if there were nothing more essential to the war? How can they trust us when now we charge them with violence after the murderous reign of Diem and charge them with violence while we pour every new weapon of death into their land? Surely we must understand their feelings even if we do not condone their actions. Surely we must see that the men we supported pressed them to their violence. Surely we must see that our own computerized plans of destruction simply dwarf their greatest acts.
How do they judge us when our officials know that their membership is less than twenty-five percent Communist and yet insist on giving them the blanket name? What must they be thinking when they know that we are aware of their control of major sections of Vietnam and yet we appear ready to allow national elections in which this highly organized political parallel government will have no part? They ask how we can speak of free elections when the Saigon press is censored and controlled by the military junta. And they are surely right to wonder what kind of new government we plan to help form without them -- the only party in real touch with the peasants. They question our political goals and they deny the reality of a peace settlement from which they will be excluded. Their questions are frighteningly relevant. Is our nation planning to build on political myth again and then shore it up with the power of new violence?
Here is the true meaning and value of compassion and nonviolence when it helps us to see the enemy's point of view, to hear his questions, to know his assessment of ourselves. For from his view we may indeed see the basic weaknesses of our own condition, and if we are mature, we may learn and grow and profit from the wisdom of the brothers who are called the opposition.
So, too, with Hanoi. In the north, where our bombs now pummel the land, and our mines endanger the waterways, we are met by a deep but understandable mistrust. To speak for them is to explain this lack of confidence in Western words, and especially their distrust of American intentions now. In Hanoi are the men who led the nation to independence against the Japanese and the French, the men who sought membership in the French commonwealth and were betrayed by the weakness of Paris and the willfulness of the colonial armies. It was they who led a second struggle against French domination at tremendous costs, and then were persuaded to give up the land they controlled between the thirteenth and seventeenth parallel as a temporary measure at Geneva. After 1954 they watched us conspire with Diem to prevent elections which would have surely brought Ho Chi Minh to power over a united Vietnam, and they realized they had been betrayed again.
When we ask why they do not leap to negotiate, these things must be remembered. Also it must be clear that the leaders of Hanoi considered the presence of American troops in support of the Diem regime to have been the initial military breach of the Geneva agreements concerning foreign troops, and they remind us that they did not begin to send in any large number of supplies or men until American forces had moved into the tens of thousands.
Hanoi remembers how our leaders refused to tell us the truth about the earlier North Vietnamese overtures for peace, how the president claimed that none existed when they had clearly been made. Ho Chi Minh has watched as America has spoken of peace and built up its forces, and now he has surely heard of the increasing international rumors of American plans for an invasion of the north. He knows the bombing and shelling and mining we are doing are part of traditional pre-invasion strategy. Perhaps only his sense of humor and of irony can save him when he hears the most powerful nation of the world speaking of aggression as it drops thousands of bombs on a poor weak nation more than eight thousand miles away from its shores.
At this point I should make it clear that while I have tried in these last few minutes to give a voice to the voiceless on Vietnam and to understand the arguments of those who are called enemy, I am as deeply concerned about our troops there as anything else. For it occurs to me that what we are submitting them to in Vietnam is not simply the brutalizing process that goes on in any war where armies face each other and seek to destroy. We are adding cynicism to the process of death, for they must know after a short period there that none of the things we claim to be fighting for are really involved. Before long they must know that their government has sent them into a struggle among Vietnamese, and the more sophisticated surely realize that we are on the side of the wealthy and the secure while we create hell for the poor.
This Madness Must Cease
Somehow this madness must cease. We must stop now. I speak as a child of God and brother to the suffering poor of Vietnam. I speak for those whose land is being laid waste, whose homes are being destroyed, whose culture is being subverted. I speak for the poor of America who are paying the double price of smashed hopes at home and death and corruption in Vietnam. I speak as a citizen of the world, for the world as it stands aghast at the path we have taken. I speak as an American to the leaders of my own nation. The great initiative in this war is ours. The initiative to stop it must be ours.
This is the message of the great Buddhist leaders of Vietnam. Recently one of them wrote these words:
"Each day the war goes on the hatred increases in the heart of the Vietnamese and in the hearts of those of humanitarian instinct. The Americans are forcing even their friends into becoming their enemies. It is curious that the Americans, who calculate so carefully on the possibilities of military victory, do not realize that in the process they are incurring deep psychological and political defeat. The image of America will never again be the image of revolution, freedom and democracy, but the image of violence and militarism."
If we continue, there will be no doubt in my mind and in the mind of the world that we have no honorable intentions in Vietnam. It will become clear that our minimal expectation is to occupy it as an American colony and men will not refrain from thinking that our maximum hope is to goad China into a war so that we may bomb her nuclear installations. If we do not stop our war against the people of Vietnam immediately the world will be left with no other alternative than to see this as some horribly clumsy and deadly game we have decided to play.
The world now demands a maturity of America that we may not be able to achieve. It demands that we admit that we have been wrong from the beginning of our adventure in Vietnam, that we have been detrimental to the life of the Vietnamese people. The situation is one in which we must be ready to turn sharply from our present ways.
In order to atone for our sins and errors in Vietnam, we should take the initiative in bringing a halt to this tragic war. I would like to suggest five concrete things that our government should do immediately to begin the long and difficult process of extricating ourselves from this nightmarish conflict:
1. End all bombing in North and South Vietnam.
2. Declare a unilateral cease-fire in the hope that such action will create the atmosphere for negotiation.
3. Take immediate steps to prevent other battlegrounds in Southeast Asia by curtailing our military buildup in Thailand and our interference in Laos.
4. Realistically accept the fact that the National Liberation Front has substantial support in South Vietnam and must thereby play a role in any meaningful negotiations and in any future Vietnam government.
5. Set a date that we will remove all foreign troops from Vietnam in accordance with the 1954 Geneva agreement.
Part of our ongoing commitment might well express itself in an offer to grant asylum to any Vietnamese who fears for his life under a new regime which included the Liberation Front. Then we must make what reparations we can for the damage we have done. We most provide the medical aid that is badly needed, making it available in this country if necessary.
Protesting The War
Meanwhile we in the churches and synagogues have a continuing task while we urge our government to disengage itself from a disgraceful commitment. We must continue to raise our voices if our nation persists in its perverse ways in Vietnam. We must be prepared to match actions with words by seeking out every creative means of protest possible.
As we counsel young men concerning military service we must clarify for them our nation's role in Vietnam and challenge them with the alternative of conscientious objection. I am pleased to say that this is the path now being chosen by more than seventy students at my own alma mater, Morehouse College, and I recommend it to all who find the American course in Vietnam a dishonorable and unjust one. Moreover I would encourage all ministers of draft age to give up their ministerial exemptions and seek status as conscientious objectors. These are the times for real choices and not false ones. We are at the moment when our lives must be placed on the line if our nation is to survive its own folly. Every man of humane convictions must decide on the protest that best suits his convictions, but we must all protest.
There is something seductively tempting about stopping there and sending us all off on what in some circles has become a popular crusade against the war in Vietnam. I say we must enter the struggle, but I wish to go on now to say something even more disturbing. The war in Vietnam is but a symptom of a far deeper malady within the American spirit, and if we ignore this sobering reality we will find ourselves organizing clergy- and laymen-concerned committees for the next generation. They will be concerned about Guatemala and Peru. They will be concerned about Thailand and Cambodia. They will be concerned about Mozambique and South Africa. We will be marching for these and a dozen other names and attending rallies without end unless there is a significant and profound change in American life and policy. Such thoughts take us beyond Vietnam, but not beyond our calling as sons of the living God.
In 1957 a sensitive American official overseas said that it seemed to him that our nation was on the wrong side of a world revolution. During the past ten years we have seen emerge a pattern of suppression which now has justified the presence of U.S. military "advisors" in Venezuela. This need to maintain social stability for our investments accounts for the counter-revolutionary action of American forces in Guatemala. It tells why American helicopters are being used against guerrillas in Colombia and why American napalm and green beret forces have already been active against rebels in Peru. It is with such activity in mind that the words of the late John F. Kennedy come back to haunt us. Five years ago he said, "Those who make peaceful revolution impossible will make violent revolution inevitable."
Increasingly, by choice or by accident, this is the role our nation has taken -- the role of those who make peaceful revolution impossible by refusing to give up the privileges and the pleasures that come from the immense profits of overseas investment.
I am convinced that if we are to get on the right side of the world revolution, we as a nation must undergo a radical revolution of values. We must rapidly begin the shift from a "thing-oriented" society to a "person-oriented" society. When machines and computers, profit motives and property rights are considered more important than people, the giant triplets of racism, materialism, and militarism are incapable of being conquered.
A true revolution of values will soon cause us to question the fairness and justice of many of our past and present policies. n the one hand we are called to play the good Samaritan on life's roadside; but that will be only an initial act. One day we must come to see that the whole Jericho road must be transformed so that men and women will not be constantly beaten and robbed as they make their journey on life's highway. True compassion is more than flinging a coin to a beggar; it is not haphazard and superficial. It comes to see that an edifice which produces beggars needs restructuring. A true revolution of values will soon look uneasily on the glaring contrast of poverty and wealth. With righteous indignation, it will look across the seas and see individual capitalists of the West investing huge sums of money in Asia, Africa and South America, only to take the profits out with no concern for the social betterment of the countries, and say: "This is not just." It will look at our alliance with the landed gentry of Latin America and say: "This is not just." The Western arrogance of feeling that it has everything to teach others and nothing to learn from them is not just. A true revolution of values will lay hands on the world order and say of war: "This way of settling differences is not just." This business of burning human beings with napalm, of filling our nation's homes with orphans and widows, of injecting poisonous drugs of hate into veins of people normally humane, of sending men home from dark and bloody battlefields physically handicapped and psychologically deranged, cannot be reconciled with wisdom, justice and love. A nation that continues year after year to spend more money on military defense than on programs of social uplift is approaching spiritual death.
America, the richest and most powerful nation in the world, can well lead the way in this revolution of values. There is nothing, except a tragic death wish, to prevent us from reordering our priorities, so that the pursuit of peace will take precedence over the pursuit of war. There is nothing to keep us from molding a recalcitrant status quo with bruised hands until we have fashioned it into a brotherhood.
This kind of positive revolution of values is our best defense against communism. War is not the answer. Communism will never be defeated by the use of atomic bombs or nuclear weapons. Let us not join those who shout war and through their misguided passions urge the United States to relinquish its participation in the United Nations. These are days which demand wise restraint and calm reasonableness. We must not call everyone a Communist or an appeaser who advocates the seating of Red China in the United Nations and who recognizes that hate and hysteria are not the final answers to the problem of these turbulent days. We must not engage in a negative anti-communism, but rather in a positive thrust for democracy, realizing that our greatest defense against communism is to take offensive action in behalf of justice. We must with positive action seek to remove thosse conditions of poverty, insecurity and injustice which are the fertile soil in which the seed of communism grows and develops.
The People Are Important
These are revolutionary times. All over the globe men are revolting against old systems of exploitation and oppression and out of the wombs of a frail world new systems of justice and equality are being born. The shirtless and barefoot people of the land are rising up as never before. "The people who sat in darkness have seen a great light." We in the West must support these revolutions. It is a sad fact that, because of comfort, complacency, a morbid fear of communism, and our proneness to adjust to injustice, the Western nations that initiated so much of the revolutionary spirit of the modern world have now become the arch anti-revolutionaries. This has driven many to feel that only Marxism has the revolutionary spirit. Therefore, communism is a judgement against our failure to make democracy real and follow through on the revolutions we initiated. Our only hope today lies in our ability to recapture the revolutionary spirit and go out into a sometimes hostile world declaring eternal hostility to poverty, racism, and militarism. With this powerful commitment we shall boldly challenge the status quo and unjust mores and thereby speed the day when "every valley shall be exalted, and every moutain and hill shall be made low, and the crooked shall be made straight and the rough places plain."
A genuine revolution of values means in the final analysis that our loyalties must become ecumenical rather than sectional. Every nation must now develop an overriding loyalty to mankind as a whole in order to preserve the best in their individual societies.
This call for a world-wide fellowship that lifts neighborly concern beyond one's tribe, race, class and nation is in reality a call for an all-embracing and unconditional love for all men. This oft misunderstood and misinterpreted concept -- so readily dismissed by the Nietzsches of the world as a weak and cowardly force -- has now become an absolute necessity for the survival of man. When I speak of love I am not speaking of some sentimental and weak response. I am speaking of that force which all of the great religions have seen as the supreme unifying principle of life. Love is somehow the key that unlocks the door which leads to ultimate reality. This Hindu-Moslem-Christian-Jewish-Buddhist belief about ultimate reality is beautifully summed up in the first epistle of Saint John:
Let us love one another; for love is God and everyone that loveth is born of God and knoweth God. He that loveth not knoweth not God; for God is love. If we love one another God dwelleth in us, and his love is perfected in us.
Let us hope that this spirit will become the order of the day. We can no longer afford to worship the god of hate or bow before the altar of retaliation. The oceans of history are made turbulent by the ever-rising tides of hate. History is cluttered with the wreckage of nations and individuals that pursued this self-defeating path of hate. As Arnold Toynbee says : "Love is the ultimate force that makes for the saving choice of life and good against the damning choice of death and evil. Therefore the first hope in our inventory must be the hope that love is going to have the last word."
We are now faced with the fact that tomorrow is today. We are confronted with the fierce urgency of now. In this unfolding conundrum of life and history there is such a thing as being too late. Procrastination is still the thief of time. Life often leaves us standing bare, naked and dejected with a lost opportunity. The "tide in the affairs of men" does not remain at the flood; it ebbs. We may cry out deperately for time to pause in her passage, but time is deaf to every plea and rushes on. Over the bleached bones and jumbled residue of numerous civilizations are written the pathetic words: "Too late." There is an invisible book of life that faithfully records our vigilance or our neglect. "The moving finger writes, and having writ moves on..." We still have a choice today; nonviolent coexistence or violent co-annihilation.
We must move past indecision to action. We must find new ways to speak for peace in Vietnam and justice throughout the developing world -- a world that borders on our doors. If we do not act we shall surely be dragged down the long dark and shameful corridors of time reserved for those who possess power without compassion, might without morality, and strength without sight.
Now let us begin. Now let us rededicate ourselves to the long and bitter -- but beautiful -- struggle for a new world. This is the callling of the sons of God, and our brothers wait eagerly for our response. Shall we say the odds are too great? Shall we tell them the struggle is too hard? Will our message be that the forces of American life militate against their arrival as full men, and we send our deepest regrets? Or will there be another message, of longing, of hope, of solidarity with their yearnings, of commitment to their cause, whatever the cost? The choice is ours, and though we might prefer it otherwise we must choose in this crucial moment of human history.
As that noble bard of yesterday, James Russell Lowell, eloquently stated:
Once to every man and nation
Comes the moment to decide,
In the strife of truth and falsehood,
For the good or evil side;
Some great cause, God's new Messiah,
Off'ring each the bloom or blight,
And the choice goes by forever
Twixt that darkness and that light.
Though the cause of evil prosper,
Yet 'tis truth alone is strong;
Though her portion be the scaffold,
And upon the throne be wrong:
Yet that scaffold sways the future,
And behind the dim unknown,
Standeth God within the shadow
Keeping watch above his own.
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