The reserve ratio creates the limit, not of how much of their reserves they can loan out, but how many times their reserve amount their reserve amount they can loan out, often 9:1. If they have a billion dollars in reserve, they can generally loan out not 900 million, but 9 BILLION! Of course this monopoly money will (usually) get paid back and vanish, but the interest doesn’t vanish. But if the interest is pulled from the general economy, where is it created? It’s created the same way, from a bank loan. But since the economy is composed of nothing but principle, there isn’t enough money in the economy for everyone to pay off both principle and interest. This results in defaults and foreclosure and it forces the fed to inject new money out of thin air. This is why we have inflation. It’s not just the fed. The fed has to inject money because of what they allow banks at the local level to do: make interest off of legally sanctioned counterfeit money.

Great job on a very well written article. You’ve changed my way of thinking on several of the topics you’ve covered, while reinforcing my opinions on the rest.

A dang nice change from the mainstream media’s simplistic, and often sensationalistic, coverage of a topic that seems beyond most viewers to care to find out more about. Good use of Joe Cabdriver language without trying to dumb anything down.

Thanks again,
-C

You’re exactly right. In a technical sense, we depend upon imported oil. But the main reason opponents of free trade chose the word “dependent” is that they wanted to associate our use of oil with drug use. It’s not the literal meaning of “dependent” that they’re after, but the emotive content of the word. In their minds, we’re addicted to oil just as a junky is addicted to heroine. They used that imagery to promote the idea of economic self-sufficiency.

As every liberal economist since Adam Smith has pointed out, the division of labor (specialization) creates wealth and at the same time forces us to depend on others for most things we need. But it’s a good kind of dependence, the kind that creates civilization. The baker depends on the cobbler for shoes, and the cobbler depends on the baker for bread. It’s the kind of dependence that generates cooperation.

Our dependence on foreign oil is a good thing because we can’t produce enough of it by ourselves to maintain our standard of living. At the same time, oil producers depend on sales to us in order to import food and manufactured goods for their citizens. Such trade builds strong communities.

Ben: “… if Hugo Chavez cuts oil off to the U.S., then america is quickly in a world of hurt..”

Not necessarily. We have already switched to other suppliers because of Chavez’s actions. But if Chavez cut off all oil to the US, he would still have to sell it to someone somewhere because he needs the revenue to keep his socialist economy afloat. The oil market is like a huge pool. If Chavez continues to add to the pool, we can always buy from someone else. For example, if Chavez sold to China rather than US, China would free up the same amount of oil that it used to buy from another country and the US could buy that oil.

I understand your argument of interdependence. I think, in most arguments which discuss that market forces would take care of the situation by themselves, the time frame in which such a change would happen is not rigorously argued upon.
I cannot wait for more than half a day without water. Countries cannot wait for a few months without energy(oil). It seems to me that such trade, between essential commodities, cannot be termed inter-dependent or symmetrical. A classical argument, though.

The words “deficits” and “surpluses” with respect to foreign trade, government spending and other things are defined terms resulting from an arithmetic subtraction. If the subtraction results in a negative, we say there is a deficit, etc., etc. This is simply accounting and does not (or, at least, should not) denote “bad,” “good,” or otherwise.

When you criticize a term like “trade deficit,” you take the word “deficit” to mean something bad or undesirable, something that people probably think should be eliminated.

Sometimes deficits are good and sometimes deficits have bad connotations. An equity deficit on a corporate balance sheet means some losses will likely occur for the creditors of the company. That’s not good. The trade activities that were creditor financed were expected, of course, to benefit all parties to the trades, but it turned out differently than expected.

A government that is allowed to run up large expenditures, year after year in excess of current taxation, leaves a potentially undesirable debt for future taxpayers who may not have benefitted at all from the original expenditures.

Similarly, large government spending in excess of revenues can increase the exchange value of the currency and result in import consumption being much in excess of export revenue. Such accumulated excesses can mean future export surpluses and consumption being less than it otherwise would have been if the import excesses had not occurred. This is not particularly nice for those who suffer such lower consumption due to irresponsible behavior of previous governments.

A better picture of the situation is that you and the supermarket are interdependent: it is an entirely symmetrical arrangement unless either is in a monopoly position. You need the water and buy in that supermarket because you like it, it’s cheaper, it’s closer (making it cheaper), or for some other reason prefer it to other water sources. But they need your business also. Without it (and that of others like you), they would earn less–might even fail. Happens all the time.

This is actually the situation with almost everything except those things in which a free market is prevented–either by the government or by an apparent lack of enough customers to justify someone going into the business. But, every day, hundreds of entrepreneurs–all over the country–”buck” the odds and offer something new–even if it’s only another pizza joint.

I got to thinking about the numbers. And first, I discovered a discrepancy between the projections for the federal budget deficit we’re normally given. For one thing, they don’t seem to count the money we take out of the Social Security Trust Fund– which is real money that will have to be paid back to everyone who intends to be an SS recipient some day.

So instead I took the amount of the increase in the total federal deficit, over the last 365 days. That number is $711.75 billion, and is an exact accounting of how much more we actually spent than we took in.

Next, I took the amount we actually took in. I couldn’t easily find it for 2007, but the total federal revenues for 2006 amount to $2,407 billion.

http://www.cbo.gov/ftpdocs/81xx/doc8116/05-18-TaxRevenues.pdf

Then I added the new expense for the FairTax prebate, which in my last post came to $450 billion.

Crunching all those numbers, the total funding requirement for the federal government to keep up current expenditures and to actually fund them from revenues is $3,569 billion (3-1/2 trillion each year).

Naturally we shouldn’t tax corporations, they just pass it along to us. So let’s divide that burden among the total population, 300 million men, women and children.

Whirr, ka-chung! Each one of us, each year, will have to pay the federal government sales taxes amounting to $11, 896 (and 66 cents). For an average family of four that would be $47,585. Unless, of course, federal spending increases.

Blake: Note that this is the funding requirement not to reduce the deficit, but just to pay out the prebate and not keep the deficit from getting any bigger.

Gentlemen: to your calculators!

Blake points out that each family of four gets a prebate on their taxes of $6,000 a year. So I’m guessing that means each person in the country would be getting something like $1,500.

Problem: there are 300 million of us. So, crunching the numbers, this means that the USG has to pay out an additional 1500 x 300 million, or $450 billion in the form of monthly checks. Has this been figured into the operating budget?

“Revenue neutral” means only doing as well as we’re doing now. So adding this payout would raise our current budget deficit of $263 billion (approx. projection) to $713 billion. I may not have a PhD in economics, but I don’t see this move as being our panacea.

Here’s my problem with it. This proposition is being made because it shifts the federal tax burden. So the first thing anyone should be looking for is who it’s shifting the burden away from… and who it’s shifting it to.

The people getting a break– and I’ll wager that includes you and nearly everyone else logging in here– are those whose income exceeds their purchases. That excess, by definition, becomes investment income.

The people being asked to carry the burden are those who are spending every cent they earn. In fact, the people upon whose shoulders it falls the hardest are those spending more than they earn. And there are quite a few of those, considering that the average American family was carrying $9,000 in household debt four years ago, a figure that has only gone up since. These are the losers under your “revenue neutral” system.

If you look at the trends, our economy is already lopsided in favor of the fortunate (those with incomes exceeding their outgo). Demographics are very easy to find that illustrate an increasing concentration of wealth at the top, with the lower four and a half quintiles steadily losing ground over the decades. So IMO a restructuring of the tax system that exacerbates this trend is a bad idea for nearly all of us, and only of benefit for the very few.

Re your specifics, it would in fact simplify the tax system. However it would not eliminate the IRS. There would still have to be an actuarial apparatus sizable enough to track all purchses of goods and services in the United States. This job would be more or less exactly as large as the job of the current IRS.

It might or might not bring an excessive tax burden onto the shoulders of the underclass– migrant workers (or “illegals”) and casual labor (the “underground economy”). By and large, these people owe no taxes under current law because even if they were to report income, it’s generally so low it would fall below the current taxable line.

Under your “prebate” plan a family of four making $26,000 (the hinge point) would gain an additional $6,000. And they would have a tax burden (assuming 100% of their income gets spent) of $6,000. Those below that line would gain some advantage. However there is a glitch.

Under the existing plan, undocumented workers now pay a premium in federal taxes. They have taxes withheld from their pay by their employers. But, as they must file under fake SS numbers, they can’t file returns to get a refund (to which most would be entitled). Instead the funds (as I recall, around twelve billion each year) go into a “mismatch” fund and become general revenues.

Under the new plan such people could not file for their prebate– unless Congress issues a dispensation giving them legal status as guest workers. So the net result is just that they will now be paying out five bucks for every four dollar purchase.

You may be happy to see them put under an additional burden, I don’t know. For me it seems unfair that people with no legal rights, whose labors are required by our society and who bring home a typical six or eight bucks an hour, should have an additional burden of payment. The real reason we have this army of illegals is because their employers won’t let politicians have it any other way. Thus the issue is becoming a perpetual political football, with the only actions being taken being punitive.

Finally, I can see no way the FairTax can either “bring jobs back home” or “increase the economy to unheard of proportions”. We already have such vast seas of investment funds that we can see their real effect: they create new forms of speculation that have a tendency to periodically crash and burn. They cannot create new jobs because they cannot equalize American wages with those of the third world. The Vietnamese, for example, have access to untold billions in investment funds… from the Chinese, who got them from us in the form of earnings. So they are putting up state of the art manufacturing plant, in a nation where wages are far below even Chinese levels.

Is this really the trick that’s going to be bringing America back? Giving even more money to the rich? I feel like I’m getting trickled down upon.

Finally, your last paragraph is pure pipe dream. You’re telling me we can remove all the embedded taxes in the purchases we make, pay only one percent in a national sales tax, and it will be revenue neutral? This doesn’t pass the smell test. Local governments are barely able to pay our cops, teachers and firemen with a 6-8 percent sales tax, plus funds from the state income tax. And we’re going to run the US government plus our perpetual war on terror for only one percent? Give me a break.

Seismic,
Don’t pay any attention to Michael’s evaluation of the Fairtax. Its bunk. It doesn’t sound like he knows the first thing about the Fairtax.

Do you like filing taxes? Neither do I. You want do it any more under the Fairtax. Do you want the IRS to stay out of your paycheck? Under the Fairtax, they’re gone.

The Fairtax is a national retail sales tax that imposes a 23% inclusive sales tax on the purchase of new products, goods, and services. So, it is a tax on what you choose to spend, rather than on what you earn. If you only spend 75% of your income in a year, the remaining 25% of your income is yours to keep tax free.

The Fairtax is revenue neutral, which means that it will at least bring in as much revenue to the government as the current income tax does.

There is also a prebate which makes the Fairtax the most progressive tax reform proposal out there. The prebate is monthly (p)reimbursement for taxes we pay on basic necessities of life. This essentially untaxes the poor. A family of four would get a check for about $500 at the beginning of every month.

The Fairtax will bring jobs back home, increase the economy to unheard of proportions, tax illegal aliens and the underground economy, simplify the tax system, and get rid of the IRS and more. That all sounds pretty good to me.

One thing I failed to mention already is that it will not just be an additional 23% on everything you buy as critics will have you believe. It will actually be about a 1% increase on things you buy. This is because, once the Fairtax is enacted, the cost of goods and services will begin to fall. This is due to the fact that the embedded costs of taxes in everything we buy will be removed. Once you replace federal income, payroll, personal, gift, estate, capital gains, alternative minimum, Social Security/Medicare, self-employment, and corporate taxes with the Fairtax, all of the costs associated with tax compliance are removed from all products. This will lower prices somewhere around 22%. So, you get all of the benefits of the Fairtax while only paying a price increase of 1%. Where do I sign? Let’s make this happen.