A Couple of Fallacies
Column by Paul Hein.
Exclusive to STR
Forgive me for repeating myself, for I have written about these matters before. However, my readership in those days, decades ago, varied between one and two, and today it must be at least ten times as large, and, as the economy crumbles, these ideas seem worth repeating.
First let’s consider the truly absurd statement: “There’s no such thing as a free lunch.” If that were true, our economy would be thriving, instead of withering. Here’s proof: suppose you have lunch in a fine restaurant, and the bill is $35. You “pay” for your meal by writing a check. Has your lunch cost you anything? You’ve simply written numbers on a scrap of paper: a negligible—if any--expense.
The restaurateur, in turn, endorses your check over to the busboy. Have you paid for your meal yet?
The busboy uses your check to buy some CDs. The record store owner then endorses it over to his dry cleaner, to pay his cleaning bill. Have you paid for lunch yet? You can see where this is going, I’m sure.
“But wait,” you say. “Eventually someone will take that check to the bank, and THEN you will have paid for your lunch, when $35 is deducted from your account.” Ah, so true! But you are a smart fellow. The next time you eat in that restaurant, you don’t “pay” by check; instead, you give the owner a note. Of course, it is not a genuine note, for it does not indicate exactly what is to be paid by whom to whom, when or where. But it does bear the remarkable legend: “this note is legal tender.” That means that, although fraudulent, it can be passed without the legal consequences usually attendant upon the passing of a bad note. In turn, this means that whoever receives the note can then “spend” it. There’s no need ever to take it to the bank, as the bank will give you nothing for it. It’s “money,” at least in the eyes of the public. With it you can not only get a free lunch, but breakfast and dinner as well. In fact, you can buy the restaurant, or anything else that catches your fancy. The catch is that you can only do this if you’re authorized to create and circulate such “notes.” That rules out most of us, for although we can generate promissory notes, we can’t dub them “legal tender,” or have them regarded as “money.” And we have to pay them with something other than more of our notes.
Well, I didn’t promise that the system would be fair, only that a free lunch is definitely possible!
Another fallacy is similar to the first. It is this: the national debt should be paid, and the banks expect that, someday, somehow, the government will repay its loans. This belief isn’t as explicit as the one about the free lunch, but the experience of most people is that debt must be paid, or very unpleasant consequences will follow. So why shouldn’t that apply to government debt?
Consider: the bank lends the government $10 billion. The interest is going to be about $500 million yearly. The bank got the $10 billion the same way it got a free lunch: by promising to pay, with its promise accepted as the payment itself! In other words, the $10 billion loan cost the bank no more than it had to pay for lunch: nothing. (In the eyes of the general public, this loan is ordinary, proper, and utterly legal, whereas even the ever-somnolent man in the street would have smelled a rat if the bank had simply directly created $500 million in profit for itself, year after year.) If the government repaid the loan, that yearly interest of $500 million would cease. Terrible! In return for having merely entered a number in an account, the bank can collect the services and goods of others to the extent of half a billion dollars yearly! Why would the bank want that loan to be repaid? Not only would the bank lose the half billion in interest yearly, the money supply would be reduced by the $10 billion principal, for as money is created as a loan, it is annihilated when repaid.
And why would the government want to repay it, when it is chronically short of funds? It is in neither party’s best interest to repay the loan.
Why is this destroying the world’s economy? Because the creation of money as a loan means that, since interest is charged, more money must be repaid than was created. But no problem!! Money is created with the stroke of a pen! Debt can be repaid by further borrowing. If the burden of debt becomes too great, and businesses close their doors or go bankrupt, Uncle Sam can continue to borrow, with his borrowing a “stimulus” to the economy. It is a “stimulus” like cocaine, or strychnine.
The economy will die from this toxic “stimulus,” but until it does, the rewards are simply too great to resist. Years ago, I attempted to calculate what the interest was on the national debt. I estimated it was about $1 billion DAILY--weekends excepted. My figures may be off: maybe it’s only half a billion today. Maybe, though, it’s more.
But as long as people are willing to provide lunch for those “notes,” the injustice will continue, and the lunch--and everything else--will be free to the creators of “legal” tender.