Uncommon Wisdom's/Real Wealth Report* stock newsletter writer Larry Edelson has written a proposal to cancel out America's debt and build a new model of prosperity that deserves serious consideration, and some rebuttal. For those who aren't familiar with Edelson, he is a an investment adviser with Weiss Research, a stock-picking service with several subscriber-supported newsletters, originally founded by Martin Weiss. Edelson specializes in the commodity space, or on, in his terms, Real Wealth in oil and other hard assets from nature.
Edelson's proposal to trade equity for American debt (Urgent: 10 Steps to Save America "**) and cancel the debt by issuing a new kind of money gets points for creativity and originality, and, after all, weren't we supposed to have gotten change we can believe in from the last election?
And I even agree with him that we can, and should, take back our sovereign right to print our own money, as guaranteed under Article 5, Section 8 of the Constitution; we don't even need to create a "new" kind of currency, as Edelson suggests. We can just resume printing of the original Greenbacks, as Lincoln first did to fund the Civil War, when NY bankers wanted 24-35% interest. These could not only be used to pay off the debt, but, more importantly, in my view, to pay for an infrastructure bank, universal healthcare and other things we have too little of already (i.e. things where there is Deflation, and where Inflation would actually be a good thing).
Edelson has 10 steps, including austerity measures and a legal restriction against running a deficit, but the most interesting and radical of his proposals is contained in step 5 (emphasis added):
Step 5. Make each American citizen's coupons convertible into ...
A. 40% of a new currency to be issued AND distributed. The new currency would not be the dollar, tied to nothing but the whims of the marketplace. If it were, monetizing the debt would be naturally, very inflationary.
The new currency would be tied to a basket of freely traded commodities. The inflationary impact of monetizing the debt would therefore be virtually zero.
As the overall value of the basket of commodities rise or fall, the
new currency's purchasing power would likewise rise or fall, while
virtually always maintaining equilibrium with what would amount to a
benchmark cost of living index.
B. A 60% equity stake in a newly formed corporation that owns the U.S. government, with dividend potential.
The other 40% equity would be held in the sovereign corporation as Treasury stock.
All revenues of the Federal government would be collected by the sovereign corporation on behalf of the American people " and all expenses would be paid by the corporation on a PAYGO basis.
In effect, the U.S. government would become an extension of a business owned by American citizens.
Who would run the sovereign corporation? Who would be its CEO? Who would run the various branches of government within the corporation?
My view: Volunteers, elected by the American citizen shareholders, all of whom have equal voting power. Campaigns would be financed out of the general Treasury of the corporation with equal funding for each candidate, but only authorized via a U.S. shareholder meeting.
Importantly, the sovereign corporation's value would rise and fall with the GDP of the nation, which would be redenominated in terms of the new commodity-based currency.
In good times, profits would be set aside in the Treasury for a rainy day, with a portion distributed equally to all shareholders as a dividend. Likewise, everyone would feel the pain equally in times of contraction.
However, if such equity could be separated from a person in any way, we would quickly revert back to the vast wealth inequity we already have. Such an equity stake would be sold by the very people who need money (either the new kind or old kind) the most, the poor and the strapped middle class. Then, who would own this equity? The rich, of course. Then their ownership of America would move from the abstract to the actual and our march towards fascism would be codified in law. Want to walk down that sidewalk? There's a fee for that. Want to drink that water? There's a fee for that too. Public services like Fire/Police/Ambulance? Pay the owners of America, Inc., please.
Step 6 has other problems:
Step 6. Abolish the current tax system and enact a national sales tax. As part and parcel of the overhaul I propose, the current IRS tax code -- and the social tinkering it's been used for -- be scrapped and revenue collection be made a department of the sovereign corporation " via a national sales tax.
All income and estate taxes would be eliminated. There have been
several studies showing that a national sales tax of approximately 17%
or less would adequately fund our entire government, including the
Well, other studies have shown that sales taxes, besides discouraging production, fall disproportionately on the poor. Since Edelson is a commodities trader, I'm a little surprised he didn't take the next logical step in his proposal by simply taxing the use/abuse of natural resources, as he implies in Step 5. The sales tax would then be unnecessary (I have separate problems with his "blank check" approach to funding the military, but he doesn't say one way or the other whether we should continue to fund foreign wars to essentially steal other country's resources, so I don't want to assume I know what he's thinking). As economists from Henry George (1839-1897) to Mason Gaffney and Fred Harrison have pointed out, there is enough value in the natural resources - including the locational value - to pay for our needs, "and to spare" though maybe not enough to fund every war that meets our leaders' whim.
Edelson goes on to say in step 10:
Step 10. Work with the G20, IMF, and the United Nations to introduce a new international trade currency. As you know from my writings, I also believe that the global monetary system needs to be redrawn largely because it is based on a flawed dollar/debt model.
So as part and parcel of the revolution to "restructure" America's finances, I believe it is also necessary to work toward a new international foreign exchange regime.
A monetary system that would effectively introduce a global firewall -- a currency that would act as a filter and buffer, preventing fiscally irresponsible nations from impacting others, and preventing crises from becoming contagions.
The best way, in my opinion: An international trade currency, used for all international transactions. For sovereignty and domestic purposes, countries would keep their existing currencies.
But all international transactions would be exchanged through a new international currency, a firewall mechanism.
One such proposal already exists, though it's being designed for corporate barter use. It's the Trade Reference Currency, or Terra.
The Terra would introduce a reference currency that is fully backed by a dozen or so of the most important commodities and services in the global market, thereby providing an international standard of value that is inflation-resistant.
I propose we adapt the Terra initiative to make it a supra-national complementary currency, intended to work in parallel with the current international monetary system to provide an effective mechanism to buffer global imbalances and help prevent the breakout of financial contagions.
Other proposals include using the Special Drawing Rights (SDRs) that exist at the IMF.
Whatever the final shape or form, a new international trade currency is needed as a global firewall, but one that would also allow sovereign nations to either keep their existing currencies, or introduce new ones on a domestic level only.
What about the private credit markets? Since debt has been eliminated and prohibited at the Federal level.
Simple: The private credit markets would continue to exist. No economy can survive without them.
Corporations would still be allowed to issue debt and borrow money from the public. So would municipalities.
Individual investors would likewise be able to obtain credit for mortgages, school loans, small business investments, etc.
The banking system and other financial intermediaries, while still part of the private sector, they would simply be forced to make more prudent loans, run their businesses as businesses, and not look to the Federal Government as the lender of last resort, or for bailouts.
Securitization of loans, which have been a huge part of the problem to begin with, would -- and should -- cease to exist.
But as I said at the outset -- and as we all know "
America faces a debt disaster of untold proportions, the fatal blows of which are now arriving.
The survival of the U.S. and our way of life, not to mention many of our liberties, are at stake, which is precisely what gold's recent rally to new record highs is telling you.
This is the first time I've seen a name attached to what will probably be the new world currency at some point - the Terra. Not a bad name, but the concept is flawed if the new currency isn't anchored in something real. Fortunately, Edelson makes it clear that it would be backed by a basket of commodities, but the question is, how would the IMF (or some new worldwide agency) get to own these commodities in the first place? Would they simply be bought on the open market by Terra participants, or...? I'm concerned that Edelson's roots as a commodity trader may blind him to the destructive power that speculation has on the world's economies - witness the superspike in oil prices to $147 in the summer of 2008, just as the world was starting to enter a depression (which we have yet to climb out of). Food riots and busted budgets were just the beginning of what speculator-priced oil caused. People starved and governments were pushed to the brink by what were essentially, hedge funds manipulating the markets. We have to return the value of nature's bounty to the government or the people to prevent this sort of speculation, which serves no useful purpose.
I'm not sure how Edelson's proposal would prevent sovereign debt crisis's either, since the Terra market could be cornered by rich speculators like any other, who would then come to own all of the participating country's Real Wealth.
There are some intriguing ideas in Edelson's proposal, especially in finally recognizing the true value of commodities and ending securitization of loans, but it needs to be fleshed out and proposed in a more formal manner than on an investment newsletter blog site. Perhaps he could expound upon these ideas here on Op Ed News in more detail.
* Real Wealth Report is a paid stock advisory newsletter of Weiss Research.
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