Mirky Markets

[Tc5...@aol.com]

A couple of days ago I posted my first contribution to internet
entertainment (marvelous markets). For some reason the text was doubled,
an error I shall try to avoid this time. Nobody contacted me and nobody
knocked on my door (to blow me away or hand me a briefcase full of
money), so I suppose that I must be “mostly harmless”. As I said before,
I have no money to risk in any kind of investment. Let me add that I do
not know anyone with money, and I do not provide investment advice to
anyone. Another night (29th-30th) of watching “experts” discuss stock
markets on cable tv annoys me enough to speak my piece in the online pub.
What I see are sharp drops in foreign stock exchange composites
attributed to the “volatile markets” with commentary setting the stage
for a 100-200 point loss day on the Dow. I suppose that some of these
folks must have sold the market short and are hoping to cover their
losses before the week ends. Perhaps the news media should provide online
disclosure of the market positions taken by all the “experts” so that the
public can see whether they are putting their money where their mouth
says the markets will go. Don’t hold your breath. Happy Halloween to all
of you who invest long term rather than using the money pump on a
day-to-day marginal basis.

“Marvelous markets” gave the reasons why I think stock market crashes in
general, and US markets in particular are a benefit to governments
desperately in debt and my (possibly unfounded) suspicion that the
government may be the originator of crashes and “corrections”. The public
has been conditioned to buy government “securities” as a “safe haven” in
times of trouble. I suggest that the public should observe that they are
buying the “privilege” of being owed money by the government. As with any
debtor, the government can repay its debts only from disposable income.
To get an accurate reading on the disposable income levels of the US
government consult Senator Helms, or take a look at document
“1997CRS11221 The Very Bad Debt Boxscore” in newsgroup
“gov.us.fed.congess.record.senate”. For those of you who were soothed by
words from the federal reserve, let me recommend document “1997CRH1901
Federal Reserve Has Monopoly Over Money and Credit in United States” on
“gov.us.fed.congress.record.house”. Segment 3 of 13 says federal
obligations are 17000 billion rather than 5425 billion according to debt
boxscore. Decide for yourself which is valid, if either. I have no
contacts with government officials or politicians, but can find out their
opinions using a web browser, as can any of you reading this. So far as I
know, none of them have ever heard of me, and would doubtless be
embarrassed by any implied association, so I assure you that none exists.
I would be willing to associate with them if I were paid a salary of 100
million per year, which (a wealthy person once assured us all) is about
the most which a person can conveniently spend upon himself.

Using the boxscore (rounding all figures to billions) 25 years ago
federal debt was 438 billion, today it is 5425 billion, which is a
compounded annual rate of 10.6 % more or less. Even corrected for
inflation (use your favorite value) that is a consistent increase year to
year. The one year change is 5232 billion to 5425 billion up about 3.7 %,
which once again you can correct using your favorite inflation figure. It
is interesting to note that a budget deficit of less than 25 billion
dollars is capable of producing an increase in the debt of 193 billion.
No doubt there is some perfectly good reason for this according to the
logic of high finance. See “Market Scorecard 10/28/97” on
“misc.invest.technical” which reported the deficit according to the White
House but not the remarks by Senator Helms regarding the debt.

Based upon the 25 year rate (10.6%) or the one year rate (3.7%) the
federal government will be forced someday to change its policies because
GDP is growing less than either. This should be obvious because you
cannot get blood out of a turnip, nor can you gain more tax revenue than
the net production of the nation without suffering the sort of
catastrophic deterioration of infrastructure which put paid to the Soviet
Union. How far away the day of reckoning may be is subject to debate, but
it will surely come within the lifetime of baby boomers like me. I think
that I can speak for my generation (somebody take a poll) when I say that
I did not vote for the policies and the political bozos who ran up that
debt, and I certainly do not intend to pay my “fair share” of it. Since
most of it was borrowed before 1988, you can figure that anybody born
after 1970 (in X generation plus) will be less than enthusiastic about
picking up the tab, because they were not even of voting age when the
deed was done. I seriously doubt that X generation will pick up the tab
(run another poll). To me this means that the debt will either be
monetized very soon, or repudiated later. I am not a betting man, so I
will graciously not characterize the chance that our government will
produce budgets which pay the debt by producing scheduled surpluses over
a period of years.

Perhaps an expert on high finance can add to the list, but the
alternatives I see are : 1) Steady payoff of the debt 2) Monetization of
the debt 3) Repudiation of the debt No doubt there is some historian out
there who yearns to reveal which of those three alternatives have been
used by governments around the world during the past couple of
generations. Kindly add a response on this thread to educate the
investing public giving the ratio of debt to GDP in each case. Except in
case 3 when the holder of the debt obligation gets nothing (perish the
thought - ignore it), a person collecting on the debt will get “money” in
exchange. See 1997CRH1901 mentioned above for insight into the intrinsic
value of the “money”, which is itself a government backed debt obligation
in small denominations. Implicit in the notion of “money” is the
assumption that someone will give you something of intrinsic value in
exchange for it. You can make your own estimate of the likely exchange
rate for the cases above.

Okay, someday you (the government debt investor) will have a bundle of
money on hand. What can you do with it when you get it ? 1) Pay off your
personal debts, which also happen to be at a disgracefully high level. 2)
Purchase the necessities and luxuries dictated by your personal
lifestyle. 3) Give it away if it makes you too uncomfortable.... 4)
Invest in real estate, buy vehicles, home improvements, etc. 5) Dispense
largess to relatives and close friends (perhaps they will tend to grow
closer) 6) Speculate in commodities 7) Speculate in other brand names of
funny “money” 8) Start your own business 9) Purchase a piece of someone
else’s business 10) Pay someone to educate you in a useful skill against
the day when you run out of money.

One advantage of choice 9 is that the money might possibly be used to pay
off some business debt. In my opinion one of the most serious problems in
any economy is the distortion of judgment resulting from debt. First you
are paying some creditor interest for the use of money, increasing your
overhead and reducing cash flow available for producing a product. Then
you get hit again because every management decision has an implied cost
associated to maintain your “creditworthiness”. It is interesting to note
that “creditworthiness” is a word of recent origin since my Webster’s 3rd
unabridged (1976) provides the definition in the Addenda at the front of
the dictionary. The *habitual* indebtedness of business and individuals
(as opposed to occasional) is historically recent and may be a dominant
factor in the low growth rate of “modern” economies compared to last
century. In my opinion it is time to kick the habit and kick out the
moneylenders whenever practical. If my history is wrong, could somebody
provide a chart of the ratio of non government indebtedness to GDP for
the past century ?

In my opinion, there are some major policy changes which would have to
accompany the monetization of the US federal debt. “Sin no more” - a
Constitutional amendment to : a) Deny the government the power to *issue*
debt instruments, including “money”. 1997CRH1901 implies that “money” is
already out of the hands of treasury and firmly in the grip of the
federal reserve anyway. Notice that this would also require a budget
surplus to stay ahead of the current account or a large government
reserve of past surpluses, preferably both. Notice that I said *issue*
not *hold*. Implicit in the notion of a reserve is the right of the
government to command a transfer of value from one party to another
through an exchange of debt instruments (held by the government) for
goods or services. b) Deny the government the right to *guarantee*
compensation of one party when another party fails to honor a debt
obligation. Notice that I said *guarantee* not *enforce*. The objective
is to avoid nonsense such as the savings and loan bailout. Deep pockets
Uncle Sam is no more. Let business judgment be based upon close scrutiny
by both parties in any financial transaction. c) Define the qualifying
characteristics of “money”, by which I mean any debt instrument for which
*enforcement* of debt obligations is guaranteed. Rather than specifying a
commodity of intrinsic value (such as gold standard etc.) this might be a
specification of how the issuer of a debt instrument must own and control
a commodity reserve backing the value of any debt instruments issued. The
“commodity” might be anything from fresh water (think about California
and Arizona) to computing resources (think about internet file server
dynamic loads). Have I beaten the horse to death with my examples ? If
not, then one more time around the mulberry bush. As I see it the role of
the government should be enforcement of the implied exchange contract as
the “money” changes hands (moving through the economy) rather than any
judgment of the intrinsic value of the commodity reserve. In a broad
heterogeneous market the various “brands” of “money” will compete in a
manner similar to the international money markets today. The transition
phase from “funny” money to new money is the tricky part. No doubt there
are thousands of economists and millions of lawyers eager to suggest ways
and means, not to mention the folks at the fed.

----------------------------------------------- Based upon prior
experience my notions regarding taxation and representation go over like
a lead balloon, but I will give it a whirl and depend upon the courtesy
of the long suffering public to ignore what they consider beneath
contempt. T A X A T I O N (first published Jan 20 1992 in “PD News”)
Proposition 1 : 1) The survival of the nation is desirable and depends
upon its wealth. 2) The wealth of the nation always needs to be increased
in competition with other nations, who in turn seek to gain advantage. 3)
The wealth of the nation is the cumulative result of economic activity,
with economic activity determining the rate at which wealth increases. 4)
Anything which directly inhibits economic activity reduces the rate at
which the wealth of the nation increases, ultimately threatening its
survival. 5) Economic activity is inhibited by increased costs. 6) Sales
taxes and income taxes directly tax economic activity, increasing the
cost of the product and production labor cost etc. which ultimately
threatens the survival of the nation. ( Let me add a 1997 economics
translation of 5-6. The opportunity cost for a seller is the sum of a)
the basic overhead and capital equipment costs amortized over units
produced plus b) the basic materials cost per unit plus c) the basic
labor cost per unit. Draw a bar on the left hand side of the page
representing the seller’s value range based upon competitive market
conditions and volume sold. Now draw another bar beside it starting
higher and extending further upward to represent the value range after
adding in all effects of regulation and taxation - the government
mandated revised cost. On the right hand side of the page draw a bar in
the appropriate position to represent the opportunity cost for a buyer to
exchange money or something else of value for the seller’s product as a
function of volume sold. Better yet, show the bars as a set of curves.
When the buyer will not purchase the product at the government mandated
revised cost for a given volume then there is a market dislocation -
nothing gets sold unless the seller is willing to perform the unnatural
and irrational act of selling at a loss below unit cost. For example
consider the possibility of an absolutely enforceable luxury tax on a
product placed at ten times the price at which the most eager customer
would be willing to purchase the product.

Due to business debt costs, regulation, taxation, and government mandated
overhead mature businesses in the US suffer from an excessive component
a) above even when components b) revised and c) revised do not bankrupt
them. They cannot compete with new foreign businesses producing the same
products unless product distribution and tariff barriers make the
government mandated revised opportunity costs equal. The death of a
company and industry may be slow but it will surely come. As I pointed
out above, taking a loss on unit sales is an unnatural and irrational
act. This is economics 101 as I learned it in 74-75. Perhaps someone will
post a note on this thread giving URL and book references for those
unable to follow my explanation. A scruffy stumblebum like me cannot
convince those who require a string of credentials to validate an
opinion. )

Proposition 2 : 1) Everyone wants wealth, whether great or merely
sufficient for survival. 2) Holders of wealth want to keep it. This
requires a secure environment. 3) Government provides security to the
citizens and businesses of the nation through its laws, personnel, and
possessions. One which does not will fail. 4) Those who derive a benefit
from a system should pay in proportion to the benefit they receive. If
they do not, then the system is inequitable and will ultimately fail in
competition with other systems which are equitable. 5) So the government
should support itself through direct taxation of wealth and user fees for
the services it provides.

I reckon the howling starts at 4) and rises to a screech at 5). Let me
add 1997 perspective.

1) Taxation without representation is theft. A citizen has an obligation
to the *nation* of citizenship, but no obligation to support a tyrannical
*government* - see The Declaration of Independence “For imposing Taxes on
us without our Consent” among other notable (and familiar) offenses. I
reject the notion that I have a *unilateral* and *irrevocable* duty to
the *government*, but accept the responsibilities of citizenship in the
*nation*. If you cannot recall the words of the “Pledge of Allegiance”
then I suggest you look it up. The definition of “Republic” may also give
you some helpful insights into my point of view. Prohibition was repealed
due to popular demand. If the American *nation* yells loud enough then
just possibly Congress can be taught the economic facts of life. My
personal opinion is that we have the technology to run continuous
referendums, and the cost of adding this direct feedback is far less than
the cost of economic ruin. Let the American people vote on anything, and
I will abide by the judgment of the *majority of American citizens*. It
is interesting to note that the federal government demands that its
employees (particularly the military) swear to uphold and defend the
Constitution (and by implication the government) but so far as I know
(correct me if I am wrong) does NOT encourage them to make any oath of
obligation to the American *nation*. They salute the flag but their lips
are sealed.

2) Representation implies accountability to those “represented” by the
incumbent of a legislative office. Regardless of theory, practical
experience shows that an incumbent who *runs* for reelection is almost
certain to be reelected. Furthermore (regardless of theory) the only
opportunity available for the vast majority of constituents to affect the
voting of those legislators occurs at fixed term elections, and we all
know the value of campaign promises. Due to the “party” system of
politics (somebody should add a URL link to this thread telling how much
the founding fathers despised political parties) the choice of
“representatives” is limited to Tweedledum or Tweedledee. Since voters
usually do not want to vote *for* someone, they stay home on election
day. Representation by geographical district (rather than at-large)
practically guarantees that the “representative” will actually represent
a constituent minority. Somebody please add a graph showing total votes
received by the elected members of each Congress over the past 100 years
superimposed over the census bureau data for citizens entitled to vote.

3) From 2) above and the problems noted in the current debate over
campaign finance reform, it should be obvious that a revision to make
America a representative democracy is needed. If you eliminate the
campaign financing then the problem of bribery/influence may be reduced
to a manageable level *if* legislators are made subject to the penalties
of RICO. If you eliminate the campaigns then there is no need for
financing at all. If you eliminate the elections then there is no need
for campaigns. You can eliminate elections by converting to a system of
representation by proxy similar to what is used in corporate stockholder
meetings. Every citizen of voting age has one vote and can allocate that
vote (at his or her option) by assigning a proxy to a person trusted to
represent the interests of that citizen. Eliminate geographical
allocation and periodic elections. A proxy can be changed to a different
person at any time, with no upper limit on the number of legislators. It
might be a good idea to put an *upper* limit on the number of proxies
which a single representative legislator can vote. If you keep the fixed
term election system of government, try adding “None Of The Above” as a
choice in the ballot box. That will bring the voters into the polls! By
the way, this form of legislature is something I read in a book in 1980.
Ask a Libertarian familiar with science fiction to tell you the name of
the book. I am confident that the American people can come up with some
better legislative system than what we have now. I am confident that when
(not if) another “recession” a.k.a. depression hits there will be a
serious effort to call a Constitutional Convention. We Baby Boomers can
solve these problems if Depression Generation just cannot muster the
energy and intellect to clean up its act. Move over gramps, you sorry old
sad sack.....

4) Suppose we had a proxy representation system as outlined above. The
legislative representatives actually represent 100 percent of the voting
age constituents. One proxy one vote is used to pass policy legislation
(*NOT* one representative one vote). There is still a problem with 1)
taxation without representation because about one percent of the proxies
are held as representative of just about all the wealth of the nation.
The legislators need to have two faces - for policy purposes one proxy
one vote, but for *allocation* purposes one *tax dollar* voted equals one
revenue dollar allocated. The tax dollars paid to the government by the
constituent go into a government managed account to be dispensed at the
discretion of the proxy holder of that constituent. No tax dollars paid
equals no money in account. A million paid minus 100,000 voted/dispensed
equals 900,000 in the account. Is there anybody in the world too stupid
to understand that ? Okay, around the Mulberry bush again. As an example
99 percent of the proxies held by legislators vote to give a loaf of
bread and a ticket to the circus to the citizens every day at a cost of
200 billion dollars. The representatives follow up on this nonsense by
voting as one tax dollar one vote, pass the hat and collect 2 million.
All watch with interest to see how fairly the proceeds are distributed
while bakers and clowns riot to protest lost revenue opportunities.

5) I do not think that anyone should be *forced* to receive the
“benefits” of government simply because they happen to be a citizen of
the nation managed by that government. Proposition 2 item 4) and
conclusion 5) should make it clear that I also do not think anyone
(notice that I did not say “citizen” here) should receive a benefit of
government unless there is a fair exchange of value resulting in an
equitable distribution of benefits. I think that most of the “benefits”
of government should be divested into the private sector where more
rational management will occur. The remaining fall into two categories -
those whose use can be denied to an individual and those which cannot.
Offhand I would say that about the only thing which cannot be denied on
an individual basis is national defense. It is just not practical to tell
an invader that he can shoot Curly but not Moe. The benefits which can be
denied fall into two groups - those where access to the benefit can be
denied, and those which are community wide and not noticed until you need
them. If access can be denied then a fee should be collected on a
subscription basis or at point of usage. All the remaining “benefits”
should be funded by a ***voluntary*** wealth tax whose proceeds go into
the government accounts voted by the proxy representatives. Recall the
presumption that proxy representatives really and truly represent the
constituents and you will notice that “benefits” get funded only to the
extent that they are desired.

6) How do you persuade the population to pay a *voluntary* wealth tax ? A
couple of simple statements of constitutional law should just about cover
it. No doubt the experts can suggest more elegant wording, but here is my
suggestion. “Value shall have legal standing in civil law only to the
extent that applicable fees and taxes have been paid. Value shall have
legal standing in criminal law according to applicable statutes and
schedules.” In other words, if you pay a wealth tax declaring that your
home insured for 100000 has a value to you of 20000 dollars and your home
burns down, then the insurance company is only obliged to pay the legal
value of 20000 rather than the policy face value of 100000. You have no
legal recourse to recover the other 80000 in civil court. From my college
days I recall an insurance business which had a big sign across the
building face “What if YOU had a fire tonight ?”. Somehow I think that
people would pay those “applicable fees and taxes”. For the remainder who
just cannot remember until too late - “Think of it as evolution in
action”.

7) Recall that “fair exchange of value resulting in an equitable
distribution of benefits” in 5) above ? That covers the case of
unproductive/unemployed persons. Some provision needs to be made to allow
*any* person to exchange value with the government in order to earn
benefits. I will leave the specification of such programs to liberals and
others concerned with such agendas. No doubt whenever the hat gets passed
for their favorites they will empty their cash boxes. The “fair exchange”
is booty swapped for the doubtless indescribable warm and fuzzy feeling
resulting from giving money away.

8) Recall “no upper limit on the number of legislators” ? Let all
legislative business be transacted on-line in the light of day. If
somebody wants to hobnob face-to-face then he/she should make suitable
arrangements and pay own expenses. So much for the smoke filled rooms of
past generations, which we are told causes cancer on a secondhand basis
anyway. It would probably be a good idea to put in a time delay on
effective date after vote tallies to give constituents a chance to jerk
proxies away from misbehaving legislators.

9) It would probably be a good idea for the new legislature to
acknowledge facts of life from its inception. Provide a mechanism for
auctioning dollar transfers from the accounts representing affluent
taxpayers in exchange for proxy vote agreements in the accounts
representing less affluent legislators. Anybody who buys influence using
any other procedure gets his/her head chopped off, or whatever may seem
appropriate to the constituents affected.

Five pages is more than enough for a day’s work. The Dow is down 125
points in line with the expectations of bearish experts. Surprise
Surprise Surprise! At 04:00 AM CST the Asian stock markets are up
slightly according to Bloomberg Online and "experts" are talking about
deflation..... I wonder how many trick or treat bags are leaving
Washington this weekend full to the brim ?

I hope you were entertained, since I have no intention whatsoever of
giving investment advice to anyone.

Sincerely, Lonnie C. Clay - TC5...@aol.com

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