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Thursday, October 10

One Solution For 1,000 Problems: Part 4 of Money, Wealth, and You

Adverse Feedback Loops a.k.a. Vicious Cycles

Economists and leaders in the two major U.S. political parties make the same mistake when they debate the best way to create financial security for Americans. No matter how different their views on America's economic troubles they believe that job opportunities and business growth are the basis of security for the individual and the society as a whole.

The mistake is that the individual's sense of security is derived as much or more from his ability to hoard a portion of his wealth than his earning income. In a modern society this translates into hoarding of money. But Americans aren't allowed to hoard money, not without severe penalties. The attempt to offset or evade the penalties diverts large amounts of time from Americans' personal and work responsibilities, causes them a host of emotional disorders and stress-related illnesses.

Those who blame all this on the uncertainties of life in a capitalist economic system are off the mark. Humans are built to take an incredible amount of uncertainty in stride, thanks in part to our nomadic past and experience with the vagaries of weather and ground water supplies during the earliest farming eras. Yet it's just because of the uncertainties that accompany the struggle to survive that humans learned to hoard wealth as protection against unpleasant surprises.

Here "wealth" simply means an abundance, not a numerical amount. A billionaire has more wealth than someone earning far less, but an abundance of money -- what money an earner has left over after all his expenses is met -- is an abundance, whether it's a billion dollars or ten.
Hoarding of a portion of abundance allows humanity to face life's unpleasant surprises with resilience. So when the hoarding instinct is repeatedly frustrated, a society begins experiencing many problems in many directions.

There's another reason capitalism isn't the culprit. Republicans argue that with enough free-market capitalism supported by low rates of taxation the American economy can generate enough job opportunities to provide a reasonable level of employment security for the individual.

The argument ignores the fact that capitalism ceased to be the driving force in U.S. fiscal and economic policies after the collapse in 1973 of the Bretton Woods agreement, which had established a new international monetary system for the post World War Two era. The system, which was based on fixed exchange rates for currency, was replaced with floating exchange rates. This meant that the U.S. government and Federal Reserve's struggle to maintain the U.S. dollar's status as the world's major reserve currency superseded all other macroeconomic and financial considerations, including capitalism.

The Democrats are also off the mark when they argue that taxation is the way to provide security in the form of financial safety nets for all Americans. The argument ignores the fact that if you inject a tremendous amount of insecurity into the society by taxing virtually every aspect of money, this when added to uncertainties about employment sets in motion a vicious cycle:

1. The more uncertain their hoard of wealth and job opportunities, the more people will seek a secure source of income. This leads to more and more people who seek a reasonably guaranteed income in the form of employment with the government.

2. The more people employed by government, the more taxes need to be levied to support the government workforce.

3. The more taxes levied, the more people look at the erosion of their wealth and protest.

4. The protests lead government to impose taxes on more and more types of saving and spending as the way to avoid steeply increasing the payroll tax. This sneaky means of raising revenue created a tax code so complex that maybe only 1,000 accountants in the entire United States fully understand it, which only adds to the insecurities of people trying to hoard a few bucks.

5. The more types of taxes levied, the more insecure people become when faced with no way to protect their wealth or nail down guaranteed employment.

Return to #1 and repeat the cycle.

The cycle set in motion other vicious cycles that today negatively impact every aspect of American society. Not the least has been the erosion of the U.S. republic. A republic is a rule of the people, but whoever heard of a long-lived ruler who couldn't protect his wealth? Power, governing power in a republic, comes not from the point of a gun but from the crushing power of wealth. Only when Americans as individuals have the ability to preserve their wealth can they as a collective rule.

One Solution For 1,000 Problems

If you accept all the above for the sake of discussion, the method for breaking the vicious cycle is pretty simple: Give people want they want. Give them a reliable, hassle-free means to protect their wealth. How to do this? Find an American banker who's spitting mad at the Federal Reserve and the U.S. federal government -- and there must be at least, well, however many bankers there are right now in the United States -- who are that mad, and talk him (or her) into trying something new for a change, like this:

Set up a liquid savings account for individuals that would require a token minimum to open the account and be like a regular savings account in all other respects except for two unique features:

1) The bank pays a baseline interest on the deposits that never changes, remaining static at anywhere between 3.5 and 5 percent (I like 4 percent).

2) Either by increasing the interest it pays above the baseline or through offering gifts or services, the bank pays enough on the savings account to offset increases in the cost of living.

So, this account is designed to allow for the preservation of wealth, which is why the bank should call it a "wealth account" to distinguish it from a regular savings account, which does not protect the savings from erosion through increases in the cost of living.

Can a bank offer that kind of account without the need to change laws? A bank can pay any rate of interest on savings accounts it finds prudent.

As to what banker in his right mind would find it prudent under present Federal Reserve monetary policy to pay out such a high baseline rate of interest --

1. The banker who knows that a bank that offered a wealth account would be so well capitalized it would be far less dependent on the Federal Reserve system.

2. The banker who knows that the present state of computer technology would allow a bank to compete with credit card companies, payday loan companies, pawn shops and other non-bank types of companies that cater to individuals who need 'tide-over' loans ranging from a few days to a month. The bank could charge less in interest than the payday loan companies and still charge more than it could on mortgage loans. In this way the bank could make up in volume with tide-over loans what mortgage loan business it would lose by charging a higher interest on those loans to offset the higher interest paid on the wealth account.

If readers are shocked that I would suggest a bank become a 'loan shark' -- then you would really be in for a shock if you studied the Wikipedia article on payday loans (these types of loans aren't necessarily tied to a payday repayment). Payday loan companies are filling a critical need at this time in the United States.

For instance, consider the number of natural disasters that afflict the continental USA; barely a month goes by that one region or another isn't being hit with wildfires, floods, blizzards, tornadoes, and hurricanes. All those disasters can temporarily prevent employed people from getting to work from a period of few days to a few weeks. Many of those people don't have savings, don't have a line of credit with a bank, and so the only way many of them make ends meet until they get back to work is through the payday loan companies.

The banks abandoned this field of emergency loans. They need to retake it. By doing so, they will win customer loyalty and establish the physical bank as a kind of community center.

Moreover, the banks can do something that the payday loan companies and other non-bank lending companies can't: offer financial advice to payday loan 'addicts' to help them break out of the payday loan cycle.

3. The banker who figures out how gifts and services can win loan customer and depositor loyalty, and build community. The sky's the limit when it comes to the kind of services that banks could provide in order to compensate savers for increases in the cost of living. This community building would also provide the bank with dedicated lobbyists. As banks became more and more distant from the public they turned more and more to high-priced lobbyists to help them fight excessive regulations. How many billions of dollars have banks spent in this fashion during the past decade, when they could have gotten the lobbying done for free?

Restoring the Banking System

A healthy banking system is the lifeblood of a modern society, yet the U.S. banking system is in effect dead because it became an instrument of U.S. monetary and fiscal policies. The lack of a genuine banking system is killing American business, American capitalism, and has greatly weakened the entire U.S. society.

There is only one way to restore the banking system, and that is by providing individuals with a reliable means to preserve their wealth and keep it liquid; i.e., readily available for use.

Render Unto Caesar

By all means the interest income on a wealth account should be taxed in the same way that income on a regular savings account is taxed. Tax-free and tax deferred methods of saving give the government additional avenues by which to impose regulations and expand their regulatory and oversight regimes.

Would the Wealth Account Kill Wall Street?

At this point some who follow such matters might say I've come up with a way to put a crimp in the shadow banking system. The shadow banking system is not going away, and for the same reason that gambling casinos will always survive. There are always people willing to take very great risks for a chance at a very high return on their money -- and there's nothing wrong with that. The wrong part happens when an entire society is forced to act in that fashion just in the attempt to stay above water.

Nor would a wealth account collapse Wall Street or the credit card companies. Wall Street is dominated by institutional investors: hedge funds, pension funds, business and government corporations, and so on. The institutional investor will always have good reasons to park money in stocks -- and bonds.

And the individual would not throw away all his credit cards once he had a wealth account. There will always be times when people need more quick cash than their bank is willing to lend them and who'll accept high interest rates to get the money.

The Psychological Benefits

A wealth account help cure a range of money-related neuroses, including the attempt to provide an illusion of wealth through a kind of self-inflicted Ponzi scheme -- a scheme built on borrowing from one credit card to keep up payments on others.

The existence of a wealth account would also tamp down fears that create market bubbles and resultant panics, and which make Americans easy victims of true Ponzi schemes and other illegal scams.

It would also tamp down the devastating gambling fever that in effect taxes Americans at astronomical rates via lotteries, and which diverts Americans from building wealth and becoming genuine investors, as distinct from being driven into high-risk securities, many of which are nothing more than legalized gambling.

The above says nothing about the great psychological value of having a simple avenue to building wealth and protecting it. In many cases, everything from substance abuse to divorce to stress-related psychological and physical disorders is rooted in fears about money that can be traced to the inability to hoard it.

Even character flaws that manifest in petty theft, cheating on exams, and lying to procure employment will lessen once people have a sense of security about their savings. It's hard to develop good character while standing on quicksand. That's what it feels like to people at the mercy of mysterious and seemingly arbitrary economic decisions that keep moving the goal posts on the field of wealth creation and protection.

Render Unto Economists That Which is the Economy

As to whether the wealth account would be inflationary or deflationary: gee, someone said that if you start sailing the ocean eventually you'll fall off the edge of the earth. I guess there's nothing for it but to get in the boat and start sailing, and see what happens. [flipping a pen in the air] I am not in the mood today to discuss the Paradox of Thrift or what economists think about the economy.

Technical Difficulties

I have made the wealth account sound simple to set up but there are technical difficulties. For instance, half the planet would want to open a wealth account as soon as it was advertised. And I wouldn't want to be a teller at the bank on the first day the account was offered. It would be like Wal-Mart on Black Friday multiplied by every other Black Friday going back to the first one.

Logistics would be only one of the technical difficulties. Nothing that couldn't be ironed out, but here is where the bank could run into legal issues because I think the ironing would involve setting up conditions for who could open the account. Yet I don't like the idea of a credit union offering the wealth account; I'd like to see a bank offer it. Ah well, what are law firms specializing in banking regulations for?

The Greatest Benefit for the Individual and Society

The pivotal problem is that every time Americans turn around their money hoard is a little less. Even if you put the hoard under a mattress its value is eroding with every hike in taxes and the cost of living. As to the argument that pay raises or higher business profits offset the hikes: the reasoning would hold true only if no employee was ever fired, no business ever had to take a cut in profits, the cost of living never increased for anyone, and life never sprung expensive surprises.

The wealth account would be the basis of true wealth preservation for the individual. The person's savings would not need to be supplemented by investments and tax schemes that the individual hopes will offset the erosion of his wealth. So the account would be a real savings account, as distinct from the faux ones that Americans are offered now.

But the greatest benefit? Predictability. More than the interest income from the account, the depositor would be able to predict that the principal would be roughly worth as much five years into the future. That ability to predict is the basis of something called "long-range planning." This kind of planning should be the reward of living in a free country, an advanced, wealthy society. Instead, Americans have been thrown into the same situation that bedevils peoples in unfree societies, in the poorest ones: things are so uncertain that people don't like to plan, or invest, beyond the short term. This prevents the society from advancing, which only entrenches short-range thinking. It's a vicious cycle, and one that is very hard to break.

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