We need a precious metal backed dollar, and a severely curtailed government. We also need to abolish the income tax, and start running budget surpluses or at least neutral budgets. After the income tax is abolished, to be replaced by tariffs on products coming from dictatorships and perhaps some other head or sales taxes,along with massively cutting government spending, then we could legalize currency competition (one could use any vehicle, say Swiss Francs or cowry shells, to settle debts).

But Socialism needs to continually inflate, so as to rob the producers to satisfy the perceived “needs” of the indolent and massive consumers of resources.

Only a radically free-market Capitalism can save the world. — Silverwolf

Thanks for reading this post. My best wishes for 2009 to you and all your lucky students.

Ron Robins

Banks will generally limit the size of a loan to a customer so that loan payments do not exceed about a third of the customer’s income. Using this rule of thumb, U.S. $14 trillion annual GDP could finance at most about $5 trillion in loan payments (principal and interest). With $50 trillion of debt, this $5 trillion payment will be entirely consumed by interest payments at a 10% interest rate. If the economy contracts, then the ability to pay is reduced proportionately.

However, given that interest rates are still relatively low and the total debt is increasing by 9% annually, it seems the United States is already unable to pay even the interest on its debt.

The amount of debt the United States can finance has reached a limit. The next step includes “monetizing” the debt by printing money thereby inflating the currency, and defaults at various levels of the economy.

The most benign way out of America’s predicament is for there to be such a surge of creativity and growth in the U.S. economy that the ability to pay off its debts is vastly increased.

It is the creativity and intelligence of the people that makes an economy grow. Scientific research (see http://www.mum.edu/tm_research/bibliography.html) on the Transcendental Meditation (TM) technique clearly shows that practice of TM increases creativity and intelligence. Social and economic applications of TM and its related programs can uplift the mental functioning of an entire population virtually overnight as evidenced by lower unemployment and other measures. We cannot afford to ignore a program like this that has good evidence of its effectiveness and costs a fraction of what is being wasted on bailouts. Here is a way to stimulate the economy that does not involve monetary and fiscal policy.

Stability leads to excessive risk taking and too much debt. Instability leads to more conservative investing and less debt. The cycle is natural and self-correcting.

Attempts by the central bank and plunge protection team to stabilize the economy cause excessive risk taking that eventually causes a huge crash.

All of life is cyclical, and the business cycle serves many useful purposes. For example, recessions cause debts to get paid off, marginal businesses close freeing up resources for stronger businesses, all businesses are forced to consolidate and become more efficient, the threat of unemployment causes people to save for a rainy day and become more self-sufficient, and so on. A mild business cycle is healthy for the economy. By interfering with the business cycle, central banks encourage the build-up of extreme imbalances.

Firstly, the present tax system encourages debt by allowing interest payments to be tax deductable, while discouraging savings by taxing interest earnings and capital gains. This situation needs to be reversed. Interest paid on debt should not be tax deductable, and this change can be made revenue neutral with offsetting changes to taxes on proceeds from savings and investment. Ideally, earnings from savings and investment should be tax free.

Secondly, there could be a national sales tax. The effect of this tax would be to discourage consumption and thereby encourage savings. The sales tax can be made revenue neutral by reducing income taxes.

Thirdly, a carbon tax on coal, oil and natural gas would help reduce global warming and encourage the development of alternatives. The carbon tax could be made revenue neutral by removing taxes on employment. Most new employment is created by entrepreneurs, but it is too complicated and expensive to hire someone. The red tape and costs involved with hiring an employee need to be reduced to the absolute minimum.

This revised tax system would help lay the foundation for future prosperity.

For international trade there needs to be an international unit of exchange. Modeled after Special Drawing Rights of the International Monetary Fund, we would suggest starting with a trade-weighted average of all currencies in the world.

Due to the importance to every nation of the value of the International Currency Unit (ICU), the calculation needs to be transparent. The only way to accomplish this is to have the ICU traded in the markets like any other currency.

Internationally traded commodities such as oil and gold would be priced in ICUs.

The ICU and national currencies would be fully interchangeable in the foreign currency markets.
The ICU would not be printed money and would have no physical existence. It would simply be a unit of account designed to facilitate international trade and flows of wealth.

National currencies need to continue so that each nation can control the monetary and fiscal policy appropriate for its needs.

However, there would be no global monetary policy and so no global central bank is needed.