In the aftermath of the 9/11 terrorist attacks, the US government passed the Patriot Act practically overnight. In 2008, as the US banking system hung by a thread, TARP was created and made law the same way. Now, with a global financial crisis of unprecedented proportions barreling straight at us, economist Martin Armstrong has a novel suggestion: let’s develop an out-of-the-box solution NOW, and have it ready for when the panic starts.
Armstrong’s Solution Conference was presented live to an audience of over 5,000 people from 47 countries. As Armstrong states in his written introduction to the conference, “What needs to be challenged are our most fundamental basic ideas of how to run a government. The proposal set out here is revolutionary indeed. But if implemented, it will also have the benefit of restoring our liberty without firing a single shot.”
Although Armstrong’s brilliant proposal is probably the single most important discussion happening anywhere in the world, both the mainstream and alternative media are categorically ignoring it. Perhaps because they don’t want to acknowledge it, or perhaps because they don’t understand it. To remedy this gross oversight, here are the key points of Martin Armstrong’s Solution Conference 2015.
#1. The Problem Is Government Debt
Before discussing a solution, you have to know what the problem is. Armstrong makes a convincing case that the problem facing the developed world is government debt. He calls this a “Sovereign Debt Crisis.” The issue, in a nutshell, is that the more money governments borrow, the more they have to increase taxes. As this graph clearly shows, taxes are consuming enormous portions of most countries economies. Much of that tax money is NOT going to roads, bridges or salaries, it is simply going to pay interest on the sovereign debt (government bonds).
It’s important to understand how government bonds actually work. While the Federal Reserve system is responsible for “printing money,” it is the US Treasury that issues bonds. This means that, although the Fed gets blamed for inflating the money supply, they only control half of the purse strings. Congress dictates how much the government can spend, and then the Treasury issues bonds to cover the difference between what the budget demands and the revenue that exists. Armstrong points out that, prior to 1971, government bonds couldn’t be used as collateral for a loan. In other words, when you used dollars to purchase bonds, those dollars were taken out of the money supply, and you couldn’t do anything with the bond until you redeemed it. After 1971, those restrictions were removed. Now, you can put up bonds as collateral, and borrow cash against them. This means that government bonds, for all intents and purposes, ARE cash.
While the Federal Reserve system is responsible for “printing money,” it is the US Treasury that issues bonds. This means that, although the Fed gets blamed for inflating the money supply, it only controls half of the purse strings. Congress dictates how much the government can spend, and then the Treasury issues bonds to cover the difference between what they want to spend, and what they actually have. The problem is that the government pays interest on bonds that they sell, but not on cash that it prints. Buying a bond is, after all, the equivalent of loaning money to the government, and loans pay interest. Therefore, since 1971, the government has been collecting taxes in order to pay interest on bonds (which are just like cash) when it could have just printed cash and not paid interest.
This leads to the second critical issue …
#2 What Is Money?
Armstrong is a tremendous student of history, and he presented an amazing survey of the history of money. It boils down to this: Money has moved beyond a simple representation of commodities like land, grain or cattle. Instead, “It represents the productive capacity of a country. It rises and falls based on the confidence of the people.”
This is a mind-bending concept, especially for those who are fans of gold-backed money or fixed exchange rates. As Armstrong puts it, “The problem is not paper money, it’s who’s issuing it.” Japan rose to be the second-largest economy in the world, not because it has any significant land mass or natural resources, but because the productive capacity of its people – educated, motivated, hard-working people – was supported by pro-business government policies. Contrast that with a country like Russia that has tremendous resources, but stifles innovation through corruption and bureaucracy.
The other side of the equation is confidence. The traditional view of inflation is that increasing the money supply causes prices and wages to rise (“inflate”). Historically, as Armstrong demonstrates, this is FALSE. Prices and wages go up when people feel confident in the future, and are willing to spend money. When people are scared, they hoard their money, “deflating” the economy. This happened during the Fall of Rome, and it is happening now: the government is producing tremendous quantities of currency, but people are squirreling it away, because they’re afraid of what’s going to happen tomorrow.
Armstrong repeatedly underscores that it is vital to understand that money has changed from the old, commodity-backed system that fit a barter economy, to a new, representative system that fits a global, technological economy. Understanding this is vital because it opens the door to addressing the Sovereign Debt Crisis.
#3 End Federal Taxation
Armstrong’s most brilliant insight is that, since money is no longer a commodity, taxes are no longer necessary at the Federal level. When money was gold coins, the King would issue them, and then he’d need to get some back in order to spend them, because there was only so much gold available. Now, since money is completely representative, government can simply create money, rather than collect taxes.
This is such a revolutionary concept that even Armstrong’s audience struggled to wrap their minds around it. However, it DOES make sense. The amount of money grows no matter what. So, as long as government spending is capped at some reasonable portion of GDP (Armstrong says he would prefer 5%, but readily concedes that this would need to be negotiable in order to obtain political buy-in), there’s no reason to bother with taxes. Rather than collecting taxes and selling bonds to raise revenue, all while issuing money to banks, the government could simply create money and use it to fund its operations. Rather than getting caught in bank vaults (like much of the money from the Quantitative Easing program has been), the money would immediately go to paychecks for government employees, payments to contractors, etc. More importantly, all the money that Federal taxes siphon out of the private sector would now STAY in the private sector, where they could be spent and invested.
At the same time, a zero-Federal tax policy would create unprecedented stability for businesses, creating an enormously attractive environment for all kinds of enterprises, reversing “off-shoring,” and reducing unemployment.
This also solves the problem of accumulating interest on public debt, because it would mean no more Federal borrowing. As for the $18 trillion of sovereign debt that the US already has on the books? Armstrong’s solution to that is equally innovative …
#4 Turn Public Liabilities Into Private Assets
To defuse the debt bomb, Armstrong proposes what is called a “debt to equity swap.” Remember, government bonds function as cash. This strategy takes advantage of that fact by swapping government bonds with “equity coupons” that could be used ONLY for domestic investment. The face value of the coupon is the same as the bond, so there’s no “haircut” or default, but instead of representing government debt that’s “as good as cash,” it now IS cash, but cash that can only be injected directly into the private sector.
Big companies don’t need cash: they’re already sitting on historically high levels of it (remember hoarding, because of lack of confidence?), but small companies DO need money, and they haven’t been able to get it from banks, because banks have also been hoarding. The “equity coupons” would open the floodgates to a tremendous round of business expansion and investment. Armstrong anticipates a whole IPO marketplace opening up, boosting employment, innovation, and even providing jobs for all those newly-unemployed IRS workers.
Of course, you can’t dump $18 trillion into the economy all at once, so Armstrong recommends doing it in “tranches” – installments – maybe 1/3 at a time.
#5 End Campaign Donations
Armstrong points out that every aspect of the Solution is interconnected. Once you remove Federal taxation, you eliminate the primary purpose of lobbying, which is to avoid taxes. Without lobbying, there’s much less incentive for companies to make huge campaign donations. Armstrong recommends ending private campaign donations altogether. If you limit political campaigns to using public funds, you reduce corruption, increase accountability (because the office doesn’t go to the highest bidder anymore), and minimize the time that politicians waste on fundraising rather than doing their jobs.
#6 None Of This Can Happen … Until It Can
Armstrong is very up-front about the fact that his proposals are far too unconventional to be considered by Washington right now. He points out that no politician is willing to go out on a limb to prevent something, because there’s no way to take credit for something that never happened. It’s much more politically expedient to let something bad happen, and then ride to the rescue.
As Armstrong put is, “we are in a crisis government.” Outlandish bills like the Patriot Act and TARP come out of nowhere and get passed in two or three days, while everybody is in a panic, before anybody has even had a chance to read them. Under the same kind of emergency circumstances, a major piece of reform legislation based on the Solution could easily be signed into law.
So, the bad news is that, in Armstrong’s view, there’s no way to avoid the “crash and burn” that will have to happen in order to get Washington’s attention. “We don’t get change without the pain,” he says. The good news is that, just this once, there will be a brilliant Solution ready and waiting.