March 10th, 2009

Credit Comes from Savings


photo credit: Darren Hester

Federal politicians love talking about “injecting liquidity” into the market. In the central banking vernacular, liquidity implies an access to credit, or, the ability to get a loan if and when you want one. Thus, in light of our economic stagnation, market interventionists continue to champion “pumping credit” into the market as a method of curing our ails.

Using their magical money-creation abilities, these people ignore a fundamental economic maxim that, when ignored, will bring a market to its knees: credit comes from savings. This is not a revolutionary principle, yet it seems that tenured economists (having long been drinking at the federal fountain of Keynesianism) cannot come to grips with the limitations it demands.

If one person wants to borrow $10 from another, this transaction would require that the lender have the money to loan in the first place. If the lender, through frugality and hard work, had accumulated enough savings to put him in a position of being able to issue loans, then he would be able to complete this transaction, charge interest if he so chose, and receive his money back in return according to the terms of the agreement. This example, though basic, illustrates the moral and common sense understanding of how loans work. You can only borrow from people who have sufficient savings available.

Enter the magical, mystical force of government. With government involved, if one person wants to borrow $10 from another, this transaction does not require that the lender have the money to loan in the first place. Instead, the broke would-be lender sticks his hand out to this new source of cash—a "lender of last resort"—and himself asks for a loan. Only then is he able to issue a loan drawing on the money he just himself borrowed.

Thus, today’s lenders need be nothing more than middlemen relying upon an external source for the money they loan to others. This credit comes not from savings, but from politically-controlled printing presses and computer accounts that can create pseudo-credit on demand. At its core, this is an inflationary action that eventually and inevitably destroys the money system altogether.

Everybody knows that you can’t loan what you don’t have. Even worse is loaning to one person that which you’ve stolen from another. We wouldn’t let a scheming individual get away with this pernicious get-rich-quick thievery, and yet when repeated exponentially and enshrined with the cloak of law, we somehow think it’s a good idea.

America is beyond bankrupt, and yet we sit idly by as the federal government issues more and more loans and IOUs. Bailouts, stimuli, T-bills, and a hyperactive Federal Reserve all compound our economic misery—generating new money out of thin air, issuing new loans from nothing, and inflating the bubble that is quickly bursting around us. We must return to sound economic principles—among them, the understanding that credit must come from savings—if we are to have any chance of stemming the tidal wave heading our way.

39 Responses to “Credit Comes from Savings”

  1. John C.
    March 10, 2009 at 1:41 pm #

    Connor,
    I’m no economist, but I’ve always assumed that liquidity isn’t a direct reference to credit, but rather to readily liquidated assets. If you are a millionaire on paper, but it is all tied up in long-term investments, you are wealthy but have little liquidity. The injections to create liquidity are supposed to make sure that banks have sufficient capital to begin lending again (as your post goes on to describe). The banks don’t have much liquid capital at present because their funds are tied up in mortgages that aren’t worth what they were originally bought for, making it impossible to liquidate these assets right now in a manner that would keep the banks afloat.

    While I agree with you that the current crisis is a mess of our own making (bankers, lenders, borrowers, and spenders), I am not sure that what you are describing here is entirely accurate.

    Also, I’m not sure that you understand the importance of credit to the day to day operations of many large corporations. It has been very common for corporations to borrow and lend millions of dollars daily to other corporations. This is because the value of investments, stock, real estate, and other factors change daily and affect the ability of corporations to pay their bills from day to day. Without this source of regular credit, any corporation could find itself bankrupt on any given day. This is all paper money (no buildings or other objects of value change hands), but it is still critical to the daily operation of these corporations.

  2. March 10, 2009 at 3:22 pm #

    John,

    I am an economist and Connor is mostly right. First, I’d like to point out that anyone using Federal Reserve notes (the ones in your wallet) trades on IOUs.

    You are right John, that most companies need liquidity in order to function.

    But also, you must keep in mind as a finance guy, that the less liquid an asset is, the more risk there is associated with it. For example, if you are shopping for a house, especially before the bubble, you understand that you can’t just take the house back to the store if it doesn’t fit your needs. So, you do your diligence and, arguably more importantly, bargain to get the best price you can. When you asked for the discount on the house you bought, you may or may not be subconsciously discounting the asset in question to hedge against future risk – what Buffet would call his margin of safety.

    It isn’t that the banks cannot liquidate its holdings. . . the banks can’t liquidate their holdings a prices that would be favorable to continue as a going concern.

    What has happened is that in recent years, thanks to new financial derivatives and a trade deficit with China, our market was flush with cash and everyone was in a buying frenzy. Not only were the Chinese, Russians, and Japanese pumping cash into our economy (with trade surpluses, the only alternative for these countries was to invest and earn a return on their idle dollar reserves) but assets were trading hands rather freely, with a tremendous amount of liquidity.

    As new instruments expanded the market (willing and ABLE buyers) for real estate (among other asset classes), real estate became more liquid. . . as a result, the risk of owning it went down (the perception that you can flip the house), and the discount went negative – boosting the prices of real estate.

    To your point about companies and banks needing cash for daily operations, many lost on cash equivalents called auction rate securities. These things were sold on the premise that they were as good as cash and they earned a much higher return than a CD. Many companies bought into this scheme as the people with the monopoly on the auction inflated the returns in the early stages. It was reported that one of the banks that was selling the securities actually held auctions in which the same bank bought some of the securities to prop up the value, inflating the returns, so that future participants were convinced it was a great idea.

    Well, at the beginning of the credit crisis, you might have read about failed auctions . . . and to this day, many of the companies have these cash equivalents on their books with no liquid market to convert them to cash. Now they are writing down the value because of this lack of liquidity. Note that this is a double whammy as companies were caught with these as assets and at the same time, companies are unable to sell these as liabilities since nobody trusts them anymore (so there goes a potential source of liquidity).

    I agree that it is important for companies to have access to liquidity to survive. At the same time, we must remember that though irresponsible companies are prevalent throughout our economy, there are some companies not in the same position. The Microsofts, Googles, and Apples of the world have tons of cash on their books. . . and you might wonder why my three examples are in the tech industry. When you consider how risky the tech industry tends to be, it is easy to imagine why these companies sit on a lot of cash and little debt.

    Well, the time of reckoning has come for the rest of the world and it is my belief that we let all the other companies that do not have the liquidity to survive fail. Sure, it would be weird to buy Microsoft branded toasters that used to be made by General Electric, Google branded airline tickets or Apple Cars, but maybe it might be a reminder that prudent business practices win.

    What we do need to stop doing is bailing anybody out and let the asset values plummet. Many of these companies having trouble in the capital markets are still profitable companies and profitable companies have value to somebody with the cash to invest. We just need the values to fall to the market-clearing price and get on with it. This is how profits are made in classical economics. I’m sure even Berkshire Hathaway would buy AIG outright for the right price.

  3. Mrs. B. Roth
    March 10, 2009 at 3:37 pm #

    I always feel a little under informed when I comment here, but this post and comments have been educational. Would it really be so awful to let those big bankrupt companies (car manufacturers, banks) just die … why do the tax payers have to keep paying for poorly run companies to continue to be poorly run. If you ruin your business, you loose it. I’d rather bite the bullet and struggle now than watch my kids face an even worse situation.

    And also, am I right in thinking that investors rely on ever increasing profits in a company? Isn’t it unrealistic to think that a company’s profits will always get bigger? Isn’t a stable profit margin good enough?

    The economy feels so hallow and fragile…

  4. March 10, 2009 at 4:03 pm #

    Well, in classical economics, in theory, profits are always driven to zero. Profits come from innovation (new technology that boosts efficiency) and downturns (through consolidation).

    When a company develops a competitive advantage in some market, competition soon follows. A true free-market economist would be against patents and rights because the dissemination of new ideas allows the market to be more efficient and more liquid, creating value. Even if this isn’t the case, it doesn’t take much time for copycats to come up with their own iPhone. The more substitutes there are for a product, the more price-elastic the demand for that product is said to be. This means that consumers are relatively sensitive to differences in price.

    Once this happens, the only way for a firm that sells a commoditized product is to discount. At this point, as we say, you don’t have to outrun the bear, just the guy next to you. When companies fail because they can’t compete, the more efficient companies are then able to acquire the assets of the failure at a steep discount, creating a cost advantage once again.

    The cycle continues and the become more and more severe because the consolidation creates ever growing agents that ultimately fail. Their profit margins don’t grow forever but the size of the institution does though we must concede that there is a law of diminishing returns. It was this cyclic nature that lead Marx to believe that ultimately there will be a revolution because there would ultimately be few capitalists left standing while the labor class will only grow with all the bankrupt capitalists joining their ranks.

    But anyways, I think you are right Mrs. Roth that we ought not to have tax payers pay for failures. It boils down to taking money from successful businesses and people and handing it out to the unsuccessful agents, rewarding failure and smoothing the competitive advantage that the smart people work hard to develop.

    Imagine going to the Olympics and watching the judges stop the leaders in a race, take away their shoes and hand them over to the slow people to even the field. . . and then allow the leader to continue once the losers catch up. Sound absurd? I agree.

  5. Reach Upward
    March 10, 2009 at 4:34 pm #

    Adrien’s comments are fascinating.

    On the issue of taking a loan from oneself: it may be argued that it works that way in practice, but I think the accounting trick is that the government is effectively taking a loan on IOUs from future tax receipts.

    When I took out my mortgage, I paid money from investors to the builder. I agreed that I would use future earnings to repay the investors. I fulfilled my agreement and I can only assume that the investors were happy with how it turned out.

    Imagine, however, if I had agreed to obligate my children to repay the mortgage debt 30 years later. The government is doing something like that.

    Before I was able to pay the builder, I had to line up the investment money (through a mortgage lending institution). What the government is doing is incurring the debt first and then hoping to find willing investors to cover the debt.

    To say the least, the government way of doing debt of late is an unsound way to do business. Even if it all works out, the debt must be repaid at some point. The options for doing this are: 1) tax increases, 2) money devaluation (i.e. inflation), 3) 1&2, or 4) default.

  6. March 10, 2009 at 4:38 pm #

    In some ways, it makes sense to keep the fear mongering and uncertainty in the future . . . this keeps investors in treasuries long enough for the government to sell at a higher price and reap lower interest rates. Too bad for those sitting on inflated treasury bonds. . . wouldn’t be surprised if this is why the fed intends to buy long-dated treasuries to artificially boost demand and keep the treasury bubble going for now.

  7. John C.
    March 10, 2009 at 4:59 pm #

    Adrien,
    I think that you and I essentially agree regarding the source of the current crisis. I am slightly skeptical that letting some of these institutions just fall apart is the answer though. As we learned from Lehman Brothers, there will be massive ripple effects. AIG, for instance, is (I believe) the fifth largest insurer worldwide (someone feel free to check that). That means that if AIG fails, so goes all that insurance for companies that acted in bad will and for everyone else, too. Certainly, the current crisis has taught us that there is no company that is “too big to fail” but the impact of just letting some of these companies go (I’m thinking in particular of AIG, Citibank, and Bank of America) would be far-reaching and grossly damaging to large numbers of people who invested in good faith.

    I am curious as to what you would think of nationalization of some of these large companies on the FDIC model? When small banks are about to fail, the FDIC regularly steps in, nationalizes it in order to guarantee deposits, clears out the bad debt, and then sells a cleaned up bank to private investors as quickly as possible. From what I am told, this is not that terrible a process (except for the original bankers). Would you support this sort of nationalization on a wider scale for these mega-institutions?

  8. March 10, 2009 at 5:52 pm #

    Interesting language, John. There is no such thing as investing in good faith – if that is what people believe they are doing when they put their money at risk, then they have no business putting their money at risk. An investor ONLY should earn a return by taking on risk. To all those that believe that those Wall Streeters get paid for doing nothing, the reality is that they are paid to take risk.

    I am not saying that this is all a bunch of darts being thrown at a board. On the other side of the equation, investors always have the duty to hedge themselves against risk. . . and therein lies another problem. AIG drained its capital, in part, because it was a major counterparty for derivatives called credit default swaps. Basically, it is insurance against the default on debt by the underlying company. So I can buy bonds and insure them by also buying these swaps. What happened is that these instruments were undervalued (too much liquidity leading to a false sense of security in the system in my opinion) and when the companies started to default, AIG ran out of money to pay its obligations.

    This is one of those systemic problems that needs to be fixed but I do not believe that nationalization is the answer. Failing institutions is the symptom, not the problem. In my empire, I would allow the institutions to fail and the investors to get burned as they should. I would simultaneously create credit-default swap clearing corporation, not unlike those established for the options and futures market.

    When you buy an option on stock, you don’t buy directly from someone selling an option. All options go through an options clearing corporation which a.) makes sure that you are good for your committment and b.) makes sure that your counterparty is good for theirs. Part of this is though standardizing the terms of the options or futures contracts but also by holding the counterparties accountable on a daily basis (remember what happened to the Dukes at the end of Trading Places?).

    In addition to solving the counterparty risk, by standardizing the contracts, they become more liquid, reducing their value and lowering the cost of insuring or hedging against loss, WITHOUT THE COUNTERPARTY RISK!

    I do not support nationalization on any level and am only marginally supportive of the FDIC that theoretically prevents a run on the bank and insures my deposit so long as it is less than 100k.

    For the most part, the government has done alright in waiting until the weekend to dismantle a bank and sell off the assets to keep the market at ease.

    But, nationalization is a slippery slope. It has been said that WAMU did not fail before the FDIC seized it and sold it to JP Morgan over the weekend.

  9. John C.
    March 10, 2009 at 8:23 pm #

    Certainly, big investors have harmed the system. Credit Default Swaps were referred to by Warren Buffett as financial weapons of mass destruction. My point is that individual folks who put their money in Bank of America or Citibank might be harmed if those mega banks are allowed to fold. Even with the FDIC, there is a risk that it might run out of money if one of these banks goes down.

  10. March 10, 2009 at 8:34 pm #

    I would allow the institutions to fail and the investors to get burned as they should

    It’s interesting you mentioned this. Just a couple of months ago I was reading Atlas Shrugged. Although I believed in free market principles, I had difficulty understanding the principle behind a passage in the book. Maybe you have a different take on this.

    To paraphrase: A lot of the “looters” were investing in Danconia Copper to gain some of the fruits of Danconia’s labor. So, he was going to show them a lesson by destroying the company overnight. It was their just desserts because they were expecting him to work for their benefit.

    As extreme as the book was, I was only mildly disturbed by this statement. I say disturbed because everyone invests in the stock market with only a superficial knowledge of the past performance (the prospectus of a mutual fund etc.). Why would this be such a bad thing? Why is this anti-free market? I am after all loaning some of my money to the institution as working capital so that I can have a promise of a future return.

    Then I remembered something that a relative asked me: What is the difference between investing in the stock market and gambling? We went through quite a discussion. I spoke of ownership of something real, knowledge of the company, study, etc. Each in turn, he gave a very twisted version of the same thing. I own a part of the company. He said he “owns” the ticket with a horse’s name on it. Things like this. It began to get very trivial. At the time I shrugged his comments off as youthful inexperience.

    Years later, I read “The Millionaire Next Door”. A very good read. Virtually useless now. But it made one assessment of investing in the stock market. The most successful only invest in a few stocks that they’ve really done their research on. And they are often in their profession. (A doctor who invests in pharmaceutical companies and so forth). They also were very active in their companies voting at stock holders’ meetings, etc.

    I have studied finances and economics for years. So, as my investments grew I felt pretty smug in my education and expertise. Then it all came crashing down. I now have less than if I had put everything in a mattress.

    It was then that all these memories came crashing together in my head. I realized that I was just a “looter” and I deserved losing the money I had put in these companies. I didn’t really know anything about them. I didn’t participate. I had no knowledge. I hadn’t done due diligence. I merely looked at a prospectus of mutual funds and expected the money to roll in.

    Many people in this country have done that with 401(k), IRAs, etc. And they now cry because they lost their money to Francisco Danconia’s scheme. So, we turn to government to save us from John Galt.

    No, we should take our licks and get over it. Let the chips fall where they may. Pick up the pieces and move on. The faster we do it the better. And the less government intervention, the faster it will be.

    I believe part of what made AIG weak was that the investors, creditors, and all that trusted AIG did so without doing due diligence. if we let it fall, it will be a long time before we let such a thing happen again. Will it hurt? You bet it will. But sometimes, when a child behaves badly enough, a spanking is the only thing that will make him come to his senses.

  11. Carborendum
    March 11, 2009 at 2:22 am #

    I would allow the institutions to fail and the investors to get burned as they should

    It’s interesting you mentioned this. Just a couple of months ago I was reading Atlas Shrugged. Although I believed in free market principles, I had difficulty understanding the principle behind a passage in the book. Maybe you have a different take on this.

    To paraphrase: A lot of the “looters” were investing in Danconia Copper to gain some of the fruits of Danconia’s labor. So, he was going to show them a lesson by destroying the company overnight. It was their just desserts because they were expecting him to work for their benefit.

    As extreme as the book was, I was only mildly disturbed by this statement. I say disturbed because everyone invests in the stock market with only a superficial knowledge of the past performance (the prospectus of a mutual fund etc.). Why would this be such a bad thing? Why is this anti-free market? I am after all loaning some of my money to the institution as working capital so that I can have a promise of a future return.

    Then I remembered something that a relative asked me: What is the difference between investing in the stock market and gambling? We went through quite a discussion. I spoke of ownership of something real, knowledge of the company, study, etc. Each in turn, he gave a very twisted version of the same thing. I own a part of the company. He said he “owns” the ticket with a horse’s name on it. Things like this. It began to get very trivial. At the time I shrugged his comments off as youthful inexperience.

    Years later, I read “The Millionaire Next Door”. A very good read. Virtually useless now. But it made one assessment of investing in the stock market. The most successful only invest in a few stocks that they’ve really done their research on. And they are often in their profession. (A doctor who invests in pharmaceutical companies and so forth). They also were very active in their companies voting at stock holders’ meetings, etc.

    I have studied finances and economics for years. So, as my investments grew I felt pretty smug in my education and expertise. Then it all came crashing down. I now have less than if I had put everything in a mattress.

    It was then that all these memories came crashing together in my head. I realized that I was just a “looter” and I deserved losing the money I had put in these companies. I didn’t really know anything about them. I didn’t participate. I had no knowledge. I hadn’t done due diligence. I merely looked at a prospectus of mutual funds and expected the money to roll in.

    Many people in this country have done that with 401(k), IRAs, etc. And they now cry because they lost their money to Francisco Danconia’s scheme. So, we turn to government to save us from John Galt.

    No, we should take our licks and get over it. Let the chips fall where they may. Pick up the pieces and move on. The faster we do it the better. And the less government intervention, the faster it will be.

    I believe part of what made AIG weak was that the investors, creditors, and all that trusted AIG did so without doing due diligence. if we let it fall, it will be a long time before we let such a thing happen again. Will it hurt? You bet it will. But sometimes, when a child behaves badly enough, a spanking is the only thing that will make him come to his senses.
    Oops…forgot to say great post! Looking forward to your next one.

  12. John C.
    March 11, 2009 at 5:29 am #

    Carborendum,
    Your ability to blame the victim both amazes and astounds.

  13. March 11, 2009 at 8:25 am #

    John,

    It isn’t about blaming the victim. I agree with Carb that it does look a lot like gambling and the difference is that the odds aren’t fixed, there is no house advantage, and investors have the means to hedge against the downside to their favor.

    Part of my profession is building a case for why I think an acquisition has a specific value to our firm. My case is based on assumptions about the company, the economy, and the geopolitical risks associated with the countries in which we do business. Do I have a crystal ball? No. Do I know where oil is going? No. Do I know where the exchange rate is going? No. Do I know where GDP per capita in Vietnam is going? No. I use history to find my most likely assumptions and my bosses always have me re-run the model with their downside projections. We look at our “worst-case” scenarios and determine if we can exit the investment at a satisfactory rate of return.

    When we shut down one of our companies because things don’t go the way we expected, which has yet to happen, we don’t have anyone to blame but ourselves. I agree that it feels vulnerable to think that there is nobody that we can go to for the answers or the help. We are the end of the line.

    As investors, it is our duty to protect our capital reserves and because of this, we find ourselves saying no to most opportunities. We don’t blindly hand money to anyone with a business plan that claims home-run returns.

    Though we do this on a much larger scale than your average 401k contributer, the concept is identical. The 401K saver needs to preserve their capital and they hope to earn a return by buying into someone’s business plan. They assign a value and hope that the company creates shareholder wealth. Why shouldn’t that person actually kick the tires on the company and see whether the premise holds true?

    In the case of AIG, it is well known that at least one person was crying wolf about the credit-default swaps. AIG would have been putting their exposure to these swaps in their public report as a footnote to their financial statements (most of the details of the public report are in the footnotes, not the statements themselves). A prudent investor ought to have seen this exposure and weighed the potential consequence.

    Any investor who doesn’t have the time to do this research should not put their money in the market. There are no risk-less investments; you can only plan for the downside and have your contingency. People who do not understand this should put their cash in their mattress.

    If I told you to invest in my pile of gold that I store in my back yard, wouldn’t your first instinct be to come see the gold? Wouldn’t you want to see how I keep it secure? These are natural instincts. To expect someone else – a fund manager or a CEO – to handle your affairs and tell you the truth is neglect of personal responsibility.

    The individual folks you speak of may or may not have known what they were doing. But it is undebatable that they were taking risk, whether they knew it or not. In my opinion, any time you hand your money to anyone and expect it back, you are taking risk and the risk is that you won’t get your money back. Isn’t this common sense? It amazes me that people question their own family members more than they will question a share of stock before they hand over the dough.

  14. John C.
    March 11, 2009 at 10:34 am #

    Adrien,
    Carborendum is blaming the victim in that he is saying that it is their fault that they didn’t recognize that they were being lied to. While any investor undertakes some risk, corporations are supposed to give you some idea of the risk you are undertaking. If a company misleads investors regarding the risks they are taking, how is that the investors fault? If I give my money to a bank being told it will be treated like a savings account, but the bank uses it to invest in risky mortgage-backed securities, is it my fault? Certainly, every time I take the money out of the mattress there is risk, but there is risk in the mattress, too. Saying that people should have understood risks when they were being actively lied to is blaming the victim.

    Of course we shouldn’t believe things that are too good to be true. This doesn’t stop the police from prosecuting these activities as fraud.

  15. March 11, 2009 at 10:53 am #

    I understand that you expect everyone to be honest. . . but this just isn’t so. Sometimes it is out of deceit but most times it is out of differing assumptions. Do you really believe the banks put themselves in this position knowing that the market would crash? No. They assumed that the risky assets would perform better than they did.

    The point is, not everyone had the same assumption about the assets. There have been differing views for some time and even people who had those views are getting burned. The only elements of fraud that we are dealing with right now with respect to losses are the Maddoffs and Stanfords. The other losses, such as the bank insolvency issue, are due to bad assumptions that the good times are here to stay and the debt would perform better than it has. Nobody made loans to subprime people believing that they would fail as much as they did. . .if the institutions made the investment knowing that they would lose their investment.

    You know, to complicate things, many of these banks AREN’T actually losing money – they aren’t cash losses. You can read more about that here.
    http://online.wsj.com/article/SB123672700679188601.html

    Another great example of how the market is not completely deregulated and is still inefficient despite what the liberals would have you believe.

    Though the mark-to-market is not the only problem in the system, it is a huge part of the lack of liquidity and confidence in the system. The rest is just repricing risk.

    In all, I think the fraud you speak of is only a small part of the puzzle (small is a relative term considering Maddoff made off with $50 billion, though the bailouts are in the trillions of dollars). The rest is bad assumptions.

  16. John C.
    March 11, 2009 at 11:43 am #

    Adrien,
    It depends on the type of investment and the the person of whom you speak. Bear Stearns (or, at least, some of its people), for instance, may have lied to its investors in regards to the risks of some of its hedge funds. Credit default swaps, which might lead to the downfall of AIG and much with it, are completely unregulated. Several people believe that the modernization acts of the 1990’s gutted government regulation so that it was minimal and that’s why it was unable to prevent the current mess. I’m aware that there are other opinions out there, too.

    I agree with you that savvy investors should do their due diligence. I don’t really think that we are disagreeing here. I am much more concerned with the small investor and the “little guy” than I am with the big timers and so I worry that if we eschew bank protection entirely that they will bear the brunt of the downfall of zombie banks. Sure, big timers might lose more, but I think they are much less likely to lose all.

  17. March 11, 2009 at 12:10 pm #

    . . . he is saying that it is their fault that they didn’t recognize that they were being lied to

    John,

    I never said anything about lies in my previous post. I blamed myself for not looking into things more thoroughly. I always believe that any contract or agreement is only valid when all parties are honest.

    Everything on each prospectus was absolutely true. But because I obviously don’t have the level of investment expertise as Adrien here, I didn’t look at these criteria he is required to look at with every investment.

    Say I told you the following:

    1) Engineering is one of the few rock solid professions right now. The need is everywhere. It has among the lowest unemployment rates in the country.
    2) I’m a licensed engineer with many years of experience.
    3) I want to start my own business and reap the benefits of this need.

    All these statements are true.

    If you were an investor, would you give me a business loan? (with an appropriate contract).

    Probably not. You would want to look at a business plan. You would then go verify all the data in the business plan. You would go through what Adrien does all the time.

    If you did not, you would be a foolish investor. And I in no way said ALL the blame was on the investor with AIG. I said it was “part of” the problem. It’s called keeping honest people honest. Whether you believe these people were honest to begin with is another argument entirely.

    Do you remember a while back when Sean Penn was pulled into court for assaulting papparazzi. Who was to blame? I say both. Sean Penn obviously did an illegal act because he committed assault. I in no way want to excuse Sean Penn for anything that he has done or continues to do.

    But the photographer knew Penn was famous for his violent temper. He is also doing something that (although not illegal) is considered in very bad taste among most of the population. Why is he doing it? Greed at the expense of someone else.

    Why was I investing? Greed. Why do most average investors? They want financial security. Well, that is only marginally more honorable.

    Honestly, I wanted money for not working anymore. I’ve since repented of that and realized that the only time I’ve been able to make and keep money was when I worked at my profession well and spent frugally. Just about everything else eventually ended up like the market.

    In the book “Little Britches” the father in the story (Charlie Moody) had an incredible morality (it is a true story). I thought at times he was being too proud, too strict. I’ve since realized that, no, he had it right. I wish I could be like that.

    To paraphrase:

    Some men work with their heads, others with their hands, most have to use both. But if you don’t contribute the work of either and expect to be paid, you are dishonest. Where does casually investing in the market fit here?

    If you’re doing the kind of research Adrien does and go to the stockholders’ meetings and participate, you are working for the company in your own way. I wasn’t doing ANY of that. Most don’t. By Charlie Moody’s criteria, most are dishonest as I was. I saw where that landed me.

    You’ll most likely disagree with this as I did when I first read it. Fine. We’ll disagree. But this is how I see it.

    Now, if there were lies and dishonesty, that is different. It’s the difference between being a fool and getting fooled. Being a fool is my fault. Getting fooled is their fault.

  18. John C.
    March 11, 2009 at 12:31 pm #

    Carborendum,
    I agree that people should do due diligence. I also don’t see money made on interest as inherently evil (although I am curious about your opinion of capital-gains taxes now). I think that we fundamentally agree.

  19. March 11, 2009 at 2:27 pm #

    John, taxes are an entirely different issue. I’m not sure how you even connected anything I said with Capital gains taxes. I also didn’t say anything about interest. Maybe you were just shorthanding for any type of ROI.

    As far as the morality of any of this: remember I’m not the originator of this philosophy. I just found that trait very admirable. And the idea of work of one’s head or hand makes a lot of sense to me. I suppose we could dissect it to death and find some flaws or exceptions. I was just commenting on a philosophy in which I see much wisdom. Is it perfect? I don’t know. I’m only now beginning to see how much wisdom there is in it. Let time tell.

  20. John C.
    March 11, 2009 at 2:30 pm #

    How are dividends anything other than interest payments (payment for someone else’s work with your money)? Isn’t that what you and Adrien are decrying with the Moody quotes? If not that, what?

  21. March 11, 2009 at 2:51 pm #

    That is why I said:

    Maybe you were just shorthanding for any type of ROI.

    In formal financial language, there are differences between growth, interest, dividends and so forth. Each has its own merits and conditions.

    And I’m not sure if Adrien subscibes to the Moody work/money philosophy. And I don’t want to put words into his mouth. That was me. Not him.

  22. March 11, 2009 at 3:54 pm #

    I think we also need to realize that the wealth accumulation from a worldly perspective differs greatly from that taught to us by the Lord. the world teaches that wealth can be had via debt (leverage) and off the backs of others labors (stealing in all its forms both legal and nonlegal) and the Lord teaches us that “by the sweat of thy brow thou shalt earn thy bread”. This commandment has never been revoked.

    I believe that if people would realize that it really is wrong to earn thier living in any other way except through laboring for thier own support, then many of the societal ills would be done away with.

  23. March 11, 2009 at 4:04 pm #

    I think many of you are over complicating this topic with your debates on what credit is or how to use it etc. The point I see Connor making here is that the banking system is filled with bogus money that really does not exist. It is phantom wealth, created out of thin air. It gives the people who get first use of it (banks and Govt’) a benefit and those who get last use of it have thier wealth stolen (via inflation). It is a wealth transfer from those at the bottom to those at the top.

    So the scheme is really just theft on a grand scale. It is gadiantonism refined and magnified on a scale only Kishkumen could enviously dream of. (If only he had access to computers and printing presses he might have been able to pull it off, darn silver currency!)

    The bottom line here: You cant lend that which you dont possess! I cant lend you my shovel if I dont own one! Right?

  24. March 11, 2009 at 4:37 pm #

    I do agree with the quote.

    I think it is completely applicable. When you work with your head or your hands, you deserve to earn your living. If you are just going to be speculative about it, you don’t deserve what you earn and therefore should not miss what you lose. . . because you didn’t earn it.

    To Marc’s point, so long as we have fiat money, it is a Ponzi scheme. I don’t think any of us debate that. But, without this system, where would you even get a shovel?

    Without the fiat money system, we would have much larger swings in the economy as it grew. I don’t know if you’d be up for that either. Don’t believe me? Why doesn’t anyone hold gold as their store of wealth? It’s completely possible to sit on bullion and liquidate it as you need. I imagine the transaction costs and liquidity of gold make the costs prohibitively high.

  25. March 11, 2009 at 4:37 pm #

    Marc. I don’t see any flaws in logic or facts here.

  26. March 11, 2009 at 4:52 pm #

    The world for thousands of years used gold an silver as money since it has intrinsic value. We know that as great civilizations went into decline they started to debase thier currency though “clipping” or “alloying” thier coinage. We see the same thing with our current mess. The mainspring of corruption in America is the Fed and its fiat money. Its practices allow for all the wars, the corrupt bribed politicians, the welfare state, the inflation tax which forces moms out of the home to work and destroys the functioning family etc.

    There has to be a sound means of money that the Lord approves of. It certainly is not a fiat money system.

  27. Jeff T.
    March 11, 2009 at 5:25 pm #

    Adrien: Without the fiat money system, we would have much larger swings in the economy as it grew.

    I’m not sure how this follows. Perhaps you could explain? It seems to me that economies without fiat money have, by and large, been more stable. That is, as long as they haven’t fallen prey to fractional-reserve banking.

  28. March 11, 2009 at 8:59 pm #

    Adrien,

    Actually, some people DO sit on gold for security. But because of federal law prohibiting individual ownership of gold bullion, they have to pay through the nose for “medallions”.

    Also, thanks to the industrialization of the public school system, most of the population cannot discern real gold from a brass lead alloy. Even those who can, find it difficult to determine the purity.

    And it appears to me that we have large swings in the economy WITH the fiat money system (c.f. the great depression and the current one). Are you saying they would be even greater if we were on a gold/silver standard? Did we have depressions on the scale of the great depression before the Fed took over? Honestly, did we? I haven’t heard of one.

  29. March 11, 2009 at 10:42 pm #

    So we have what some of you here would agree with as the ideal: A non inflationary, no fiat currency, no central bank, gold standard, free banking system. I’m interested in some ideas–how do we get there?

    Now I think it would take some pain. Lots of pain really. Heavens, if someone like Ron Paul (sole Presidential promoter of free banking) had by some miracle won the Presidency and somehow got congress to go along, it would be beyond a miracle to have the government stand still as the financial structure of the US came crashing down around us and for the people to actually let it happen. The tendency is obviously for the people to demand the government intervene–or for the government to demand that the government intervene. So we are talking about a huge, ugly, devastating crash here. And really all at once if we were to really just step aside and let it happen. If we had done that–our economy would be in shambles right now. (Yes, I know, like it isn’t in shambles or on its way there right now.)

    Ok, so instead our government has intervened…again. We have once again delayed facing a growing (‘growing’ is much too mild) problem. But is there any path to a free banking system that wouldn’t just tear our guts out economically and financially?

    I guess my line of thinking is this: Is there a nice way to get there or could a Free Banking/Gold Standard, etc only come after a complete collapse of our current system, and only then if people smart up enough to realize the the system itself is at the heart of the problem?

    And I know I’m taking some liberties here–not all of you believe in a Free Banking system. It just seems so entirely obvious to me when you look at our current system which has destroyed and stolen so much wealth through inflation, a system which IS NOT stable or immune from boom and busts, which has unfairly forced down other countries’ economies by our exporting our inflation to them…it’s just ridiculous. It’s sad. It’s enslaving. For freedom to prevail, this system has got to go.

  30. March 12, 2009 at 7:20 am #

    Carb, we did have depressions before the Great Depression – it was great compared to the other depressions. I think you are right though. I was under the impression that before 1974 we were always on the Gold Standard but it seems that that only started in 1900. So the depressions of the 1800s were on fiat currency used to pay for the Civil War. But there were two depressions of the early 1900s, the Depression of 1907 and the Great Depression, both while we were on the Gold Standard.

  31. March 12, 2009 at 8:01 am #

    Dima, I am totally with your thinking. One only needs to read Revelations 17 and 18 to see where the current system leads this nation.

  32. March 12, 2009 at 9:52 am #

    Thank you, Adrien.

    I’ve read up a little since my post. It appears that different sources disagree whether these you mention were actual depressions or merely recessions/panics. All except for the one in 1837 (is that the right date?) That one everyone seems to agree was a depression. But it was still not as bad as the 1930s.

    I guess it’s not surprising since no CLEAR definition of a depression is commonly accepted.

    Dima,

    I don’t believe it is possible to soft land onto a gold standard. Too many people in power love this system and won’t allow the population to take it away. Only a tremendous shift in power, political, or economic situation would cause the nation to re-think it’s financial system.

    But any way you look at it, I think we’re about to see it in our lifetime.

  33. Jeff T.
    March 12, 2009 at 10:15 am #

    Also, it isn’t just the gold-standard that is needed. Previous recessions/panics etc. have been partly due to fractional reserve banking. While fiat money can artificially inflate the money supply, so can banks who lend more than they have.

  34. March 12, 2009 at 10:22 am #

    I wonder. . .

    If you limit the money supply by strictly adhering to the amount of precious metals available, doesn’t that limit the amount of capital available in the market? The cost of capital would skyrocket, wouldn’t it? Anyone care to guess what the implications of that would be?

    Second, why is there no modern example of the gold standard? Why doesn’t any economy in the world use it?

  35. Jeff T.
    March 12, 2009 at 10:36 am #

    Adrien,

    As I understand it, the value of money would increase over time (rather than decrease, as in an inflationary system). A fixed amount of money would grow in its purchasing power. Many people would say this is a good thing.

  36. March 12, 2009 at 11:19 am #

    Adrien,

    It depends on what you consider “modern”. Switzerland only gave it up in 2000.
    Look at this article by Jean-Marc Berthoud PRIOR to the abandoning of the gold standard by Switzerland. (you’ll have to get past the first several paragraphs which discuss some then current event issues with worldwide Jewish organizations and Swiss banking.

    A few things about the gold standard:

    1) If we never put more gold into Ft Knox, then yes. It only means we would have deflation. Not as a negative economic issue, but as a sign of economic growth. It also means we can have a cash shortage (as the one just prior to the great depression).

    2) We CAN get more gold. It doesn’t have to be gold. It just has to be something that is difficult to get, is easily tested for purity, is widely held as valuable & rare, etc. That way an economy has to discipline itself in order to issue more money. We couldn’t have the kind of free-for-all mass printing of money that we have now.

    3) If we just increase circulation of funds then the economy CAN grow without increasing the backing or cash supply. This means goods and services are the backing for the increase in the economy. The greater the PRODUCTION, the better and stronger the economy.

  37. March 15, 2009 at 6:27 am #

    Carb, yes America needs to be based on production not debt. This would create prosperity for America and any nation that applies the principle. “By the sweat of thy browe” ..right?

  38. vontrapp
    March 15, 2009 at 5:51 pm #

    @adrien

    If you limit the money supply by strictly adhering to the amount of precious metals available, doesn’t that limit the amount of capital available in the market?

    Actually, in a way yes, but in all reality not at all.Let’s say I have 120 carrots and you have 80 beets. Between the two of us we have 40 dollars. Suppose all of this was trade stock (non of it set aside for savings) so you might expect a beet to sell at 50¢ and a carrot for 33¢. Now imagine there was zero inflation in this small economy, but somehow we find out ways to produce more carrots and beets. Thus, this economy has grown, that is a growth in REAL output, a growth in PRODUCTION. It is a fallacy to think that a money supply has to increase to experience growth. Anyway, after the growth, I produce 200 carrots and you produce 160 beets. Now a beet sells for 25¢ and a carrot for 20¢. Oh no! We’re hurting! We can’t sell our stuff for as much as we could before! Well in fact it’s all relative, so with the same money we can really get MORE beets or MORE carrots according to our desires, so we are BOTH better off! The deflation is not something to be shunned in an inflation-less economy.

    The cost of capital would skyrocket, wouldn’t it? Anyone care to guess what the implications of that would be?

    In fact, as I showed, the cost of “capital” (the dollars) would be more expensive in terms of carrots or beets. But in fact, you would need LESS dollars to achieve the same ends as before, so it all evens out. The price of capital goes up precisely because the capital is actually worth more (that is it really goes farther, so you need less of it).

  39. March 16, 2009 at 10:04 am #

    I suppose, no matter what our assumptions are on the nature of money, we can all agree with the late Dr. Adrian Rogers (1931 to 2005) when he offered the following observation several years ago:

    “You cannot legislate the poor into freedom by legislating the rich out of freedom. What one person receives without working for, another person must work for without receiving.

    The government cannot give to anybody anything the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that, my dear friend, is about the end of any nation.

    You cannot multiply the wealth by dividing it.”

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