Outscheming the Kleptastrophe

Outscheming the Kleptastrophe

"Exactly as taxation is a forced levy on the community's money, so the issue of new money is a forced levey in kind on the wealth-on-slae in the community's marts. Just as it is unthinkable that private people should have power to levy taxes so it is preposterous that the banks, in the teeth of all constitutional safeguards against it, should by a mere trick usurp the function of Congress and, without any authority whatever, make forced levies on the community's wealth. But no one can pay taxes, or, in a monetary civilization, discharge any obligation or debt at all until there is money. The provision of the correct quantity of money should be the first and most important duty of the State."
-- Frederick Soddy

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After winning the Nobel Prize for chemistry, Frederick Soddy decided he could do greater good for humanity by turning his talents to economics, a field he felt lacked a connection to biophysical reality. In his 1926 book Wealth, Virtual Wealth and Debt: The Solution of the Economic Paradox, (a book that presaged the market crash of 1929), Soddy pointed out the fundamental difference between real wealth – buildings, machinery, oil, pigs – and virtual wealth, in the form of money and debt. Soddy wrote that real wealth was subject to the inescapable entropy law of thermodynamics and would rot, rust, or wear out with age, while money and debt – as accounting devices invented by humans – were subject only to the laws of mathematics. Rather than decaying, virtual wealth, in the form of debt, compounding at the rate of interest, actually grows without bounds.

The problem that we’re seeing in the US has arisen because the amount of real wealth is not a sufficient lien to guarantee the staggering outstanding debt which has exploded as a result of banks’ ability to create loans, financing, among other things, the US government’s war and bailouts deficit,

Real wealth is concrete. Financial assets are abstractions. Existing real wealth serves as a lien on future debt. For example, the 100 dollars of virtual wealth that I carry in my wallet are a lien on real wealth in that those dollars enable me to buy pork at the store.

A farmer who raises pigs faces biophysical limits on how many pigs he can take to market. But if that pig farmer took on debt – a promise to repay at a future date – he would in effect be issuing a claim or lien on his future production of pigs. If he borrowed the equivalent value of 100 pigs, he could represent the loan on his balance sheet as “-100 pigs.” While debt as the farmer’s accounting entry is negative, negative pigs do not really exist. If the farmer should suffer a series of lean years and be unable to pay the interest, he might soon owe more pigs than could be raised on his farm. After a year, with interest looming, he’d show “-110 pigs”; in 5 years, “-161”; in 40 (assuming a patient bank), “-4526.” When the bank finally came to call on the pig farmer to collect repayment of its loan, it could well find that most of the virtual wealth that had grown so appealingly on its books had to be written off as a loss.

The conventional wisdom is that when faced with the threat of recession and business failure, the solution is to grow the economy so we can grow our way out of the crisis. But because the wrong diagnosis is made, namely that businesses are in trouble because access to loan credit has tightened, the wrong solution is proposed.

To keep up the illusion that growth is making us richer, we deferred costs by issuing financial assets almost without limit, conveniently forgetting that these so-called assets are, for society as a whole, debts to be paid back out of future growth of real wealth. That future growth is very doubtful, given the deferred real costs, while the debt continues to compound to absurd levels.

Read more Sody excerpts from Wealth, Virtual Wealth and Debt on this unusual text youtube
http://www.youtube. com/watch? v=q10CAWz7ahs

read the entire book pdf
http://abob.libs.uga.edu/bobk/wvwd/

Not single volume of C. H. Douglas or Arthur Kitson spells out the economic case for populism as does this book by Frederick Soddy. Here is holy fire to overcome the enveloping darkness. Pay special attention to Chapter 7, below. The people cannot reform a crooked monetary system unless they know 1) how the cheating is accomplished, 2) under the protection of what grand deceptions deceptions and 3) what to system and principles to replace it with.

Dick Eastman
Yakima, Washington

Frederick Soddy's Wealth, Virtual Wealth and Debt, 1926

Dedicated to Arthur Kitson
The British Pioneer of the New Economics,
to whose writings the author owes
his initial interest in the fascinating problems of
wealth and currency