BOOK TWO
III - NEW SHAPE OF CORNUCOPIA

 

5. THE CRAFTY MAGICIAN

State must have the authority to match its responsibility and authority, in our "positive reinforcement" based structure, means wealth and the right to spend it. As a new deal with the Octopus will give the State responsibility over the management of our human resources and a mandate to sponsor entrepreneurship, it must carry the power to raise and spend appropriately the funds required to attain our objectives. Haven't you wondered for a while now, how we will pay for all of this?

Give... and take

Well, let's realize first, with the proper mixture of awe and contentment, that we are already doing it. Looking at the State's spending habits - in 1984 of Orwellian fame, for example - we can see that a mere $24 billion went to general administration expenses and a trifling $46 billion to what we might call "infrastructure and free-access services". The real money these days is for "perequation" payments, meaning payments to equalize. $237 billion on Defense (mostly to keep the wheels turning)..., $108 billion of interest on the debt... and $425 billion in transfer payments. Over 90% of the budget is already committed to equilibrium between consumption and production, and transferring money as needed, to either the rich or the poor, has become, by far, the modern State's major function.

Where does the money go? The State gives money to the Haves paying interest on the public debt and providing a profit on military production contracts; it gives money to the Have-nots through direct transfer payments, of course, but also making it possible to pay salaries in the military production sector and offering free-access services to both the poor and the rich, which - since the poor do not pay taxes to contribute to their cost - is the equivalent of a transfer payment in kind. The net result of these operations is, at present, a yearly transfer, from "rich" to "poor", of about $800 billion in cash and services and the most visible straight "transfer payments" part is growing: 28% of the budget in 1960, 38.5% in 1970, 53% in 1984.

Now, we must understand something very clearly. The question is not whether this transfer is fair or unfair: we are dealing here with necessity. This is the transfer of wealth that our Governments, past and present, believed to be necessary to attain "level of consumption" income.. and thus to keep the wheels turning, maintain the power structure in place, hold our society together and, finally, try and make everybody as happy as possible. Our Governments may have been wrong, up to a point, but not much..., for otherwise the system would have collapsed already.

These transfer figures do not depend on the whim of rulers and politicians, but vary with changes in our technological structure. They can be modified over a reasonable period of time, but nothing in our power - save the destruction of the structure itself - can alter them significantly on the spur of the moment: they express the interdependence between production and consumption in our society. The State has been involved for quite some time, now, in wealth redistribution... and transfers no more, no less, than what it must. The question, therefore, is not whether to transfer more or less through GIA: we will transfer about the same. The noteworthy changes to be expected from Clause #1 will not be in terms of dollars and cents transferred, but in terms of how we will do it.

As giving and spending go, GIA is the most significant step we can take. Guaranteed Income will not only advantageously replace most transfer payments, it will have an impact as well on other categories of "spending for equilibrium". A decision to work only to produce will turn a revamped military production into just another normal sector of production, and elimination of the employment-related constraints on production may limit subsidies - (except in agriculture, where they obey totally different considerations) - to what is necessary to support a re-orientation of our production objectives. GIA will consolidate the giving half of the "transfer for equilibrium" policy.

The giving half, by all logic, should be only one side of the story. The State has accepted the responsibility for equilibrium and welfare but it does not seem like it can afford it. Public debt has increased fourfold in the last fifteen years, and grew by over 20% in 1983 only! It seems that we are now on a collision course with total financial breakdown, even if we take none of the steps to make a deal on Clause #1 that are so essential to our survival as a society. And we haven't said a word yet about this Past Due 13-figure bum cheque still waiting to be collected.

To make matters worse, the State, as we move into the Creative Society, will be more and more committed to positive reinforcement... and nothing so rude as taxation, direct or indirect, is likely to be acceptable; even revenues from the sale of services will probably decrease, since it will be very popular to give free services to the population and people will not only resent anything that looks coercive or restrictive, but will expect the State to give more for less, to invent something like the Perpetual Giving Motion...

How shall we raise the funds we need? Can the State do anything with the means at its disposal to obtain the revenues it needs without creating bad feelings, and to substitute for antiquated methods that are offensive, others that will achieve the same result efficiently and with more elegance? We certainly had better find something, because our present financial manoeuvres are unlikely to let us avoid bankruptcy.

"Rev's" in new garb

To get revenues for the State has always been something of a headache. Revenuers are not popular. The original primitive method of tax collection consisted in sending armed men to grab grain, hogs or whatever they could in the name of the King. Later on, when collective wealth passed the point where it ceased to be practical to hoard grains and other commodities, GOLD became the symbol of wealth. More compact and easier to transfer, it made it possible for top-dogs to hold more significant wealth conveniently. Possible also for rulers to get at it more easily... The modified primitive method of revenue collection consisted in robbing the gold. From top-dogs if necessary, but preferably from Indians.

Wealth kept growing and evolving. Global assets of the Nation are now worth roughly $15 trillion - (millions of millions ) of dollars, and mark my word that we will soon begin to count like scientists, using "gigabucks" for billion and "terabucks" for trillion...!. Quite a target for tax collection. In real terms, these assets may be said, for our purpose, to consist of two broad categories: goods which have direct welfare value... and "fixed capital", which is an investment in our productive capacity.

The first category consists of real estate - houses, land on which buildings can be erected - and "durables", like cars, appliances, etc. These assets have immediate use value. They also have a "price" but, welfare-wise, their price is a simple convention. The fifty-year old house now going at $100,000 procures to-day the same welfare it did, two generations ago, when its price was only $10,000; it will be the source of the same contentment, no more no less, when its price tag, in time, will become $1,000,000... (which would have been in the Mid-Nineties, if prices had kept the trend of the early Eighties...!). By any price though, it will still be the same house. Real immediate value and a conventional price.

Fixed capital is more tricky. Its worth a factor of the expected value of what we expect to produce with it. The value of fixed capital fluctuates with these expectations, so the second category of assets has conditional rather than immediate value, and it is to this conditional value that a price is applied, a price that is also conventional, of course.

This is in terms of real assets, but wealth has kissed reality good-bye a long time ago. When it attained the critical mass beyond which it could not be expected ever to be transmuted back into anything material, but simply to remain forever an instrument of power, wealth left behind the excessive "materiality" of gold itself and a third broad category of wealth was born. The third category of wealth consists of "credit instruments", money and the like, intrinsically worthless paper recognized as wealth by "Authority"... and therefore as a promise of welfare. It has symbolic value only and is pure "price": with credit instruments, it is the value, that becomes conventional.

"Authority". There were bankers in Florence and China who thought about "credit instruments" long before it became essential for wealth to "go symbolic". When time was ripe, though, the State alone had the Feds and Marines to make its word stick; so wealth-as-power was entrusted to the State. It became the duty of the State to issue and distribute, as "money", the power chips needed for optimal stress and equilibrium. It was, needless to say, very convenient for the State to have wealth rest on faith and trust... in the State.

Before, the only way to increase wealth, restricted then to the first two categories, had been to work, discover, dig for, or produce some more... For the State to get its pound of flesh, it had been necessary to go and get it. Nasty. With credit instrument-type assets, the way to have more wealth, would now be to print more. Not even to print more, actually, merely to sign up and wish them into existence. It would no longer be necessary, in order to obtain revenues, to send men in arms around the countryside; the State had a magic wand: it could print as "wealth" all the power chips it required...!

Within limits... To be acceptable to the money holders, the arrangement would demand that the State show commendable restraint in its printing activities. The lucky one with greenbacks could feel he had something worth fighting for - and money, thus, could remain the symbol of wealth and power - only insofar as there persisted a relative scarcity of the things that money could buy and, most of all, a scarcity of money itself. Since the "power chips" had no real value, more of them standing as symbols for the same quantity of goods would obviously have each chip represent less of reality... and would reduce its conventional value. A dollar might keep its "price", as a dollar, but might represent one Coke in the Eighties - rather than twenty in the Forties... or stand for 1/400, rather than 1/35 an ounce of gold.

Another limit to printing, which was a direct consequence of the first, was that wishing more credit instruments into existence modified drastically the balance of power between holders of "real" and "symbolic" wealth. Owners of things of "real value" would then see the "price" of their assets increase, while holders of credit instruments would see the "value" of their symbolic wealth decrease. The latter would lose, but someone would be on the receiving hand of the operation: the winners would be the debtors and, amongst those, the State itself...!

Temptation... How would the State use but not abuse its Jovian power to issue wealth and power? Self-control... Trust... Confidence... Credibility... It would be vital for the State to dissipate the fear that the printing press might be churning away at night, about to make all the power chips worthless through uncontrolled inflation.

The juggling distraction

To show good faith, the State, although it was now the privileged issuer of all power and wealth, went through the act of running after taxpayers. To begin with, it swore to let the Federal Reserve Bank issue the power chips impartially; then it established elaborate modern fiscal policies, the equivalent of annually showing its hands clean of printer's ink.

The State was to get its revenues from "indirect" and "direct" taxation. They represented a vast improvement over primitive methods, but both direct and indirect taxation were counter-productive. These "modern" ways to obtain revenues had in common the serious drawback of hitting the taxpayer at the most inappropriate moments, precisely when he was doing one of the things that we most wanted him to do. Indirect taxation, "sales tax" and the like, struck at the consumer when he was buying..., while direct taxation,"income tax", caught the worker when he was working and the investor when he was keeping wealth productive...! Neither did these methods take full advantage of the modern State's position as the sole issuer of power chips. So, with the impact of affluence, interdependence, the trend toward positive reinforcement that made taxation more unpopular still, and the necessity of increased transfer payments for equilibrium, self-discipline became harder for the State to maintain.

Governments like to be popular and would rather get away from taxation by indulging in some magic, such as always giving things away and never asking for anything in return... Where would the money come from? Through the ups and downs of the "economic cycles", our modern governments began to cheat a little.

You have heard a lot about economic cycles, haven't you? If you already know all there is to know about them don't bother with the next five paragraphs but, if you are still a little puzzled by it all, just read on; we are going to make it insufferably simple and thus create for ourselves some enemies amongst far-seeing economists.

"A cycle is a cycle is a cycle" .... meaning that we do not have to argue here where it begins. Very sophisticated calculations exist to try and prove that, in such and such specific occasion, the real cause of the cycle was with this rather than that factor, but this is of no interest to our present purpose. There are economic cycles, that's all. Let's jump aboard the cycle at the point interest rates go down, for instance, which is as good a point as any, more precisely when the State lowers the interest rate on Government bonds.

What happens when the State reduces the interest on Government bonds? Well, all other interest rates on the market follow suit, since they do not have to compete anymore with Big Brother's higher rates, and capital owners make less money. This is a blessing, first to entrepreneurs who can get cheap capital and increase production, and then to the labour force for whom there is more production, meaning more employment, more income and more demand for the added production: very simple.

Simple as juggling with delicate crystal-ware! Day after day, demand fluctuates to respond to facts and fancies, and may exceed production, causing people to offer more money - then in "surplus"- to obtain the goods temporarily in short supply, thus creating inflation and a lost of faith in the purchasing power of the dollar. Power chips in trouble, white hair for top-dogs. The State will react against inflation, by increasing the interest rate on Government bonds, producing exactly the reverse of the effect we have just seen. Extra burden will be put on the entrepreneurs, leading to less production, less employment, less effective demand and - because greater efficiency is obtained in times of hardship and manpower will be reduced more than production - an adjustment of demand to production and "equilibrium" for a while at a rather low level of consumption. The positive result, though, will be regained credibility for money.

With consumption and therefore expectations at a low level, you may drop the crystal-ware from the other hand, because production will exceed demand, very "credible" but high-priced money will find no takers amongst entrepreneurs, and the problem will be glut. Global glut we have discussed at length before, but if the official soothsayers' verdict is that we face "distribution-related glut" - and it is believed that too much money stays with the "rich" who hoard it, rather than go to the "poor" who would spend it - the State will take from the rich, one way or the other, and transfer money to the poor: the easiest way to get it is taxation. Redistribute, and you have more effective demand and more entrepreneurship, reaching out to greet the desire in money owners to keep money active, even at a lower yield

The State then makes it possible by lowering the interest rate. And on..., and on..., as we alternate the manic-depressive cycle of booming inflation and "no-nonsense" money credibility, stopping inflation just before investors lose their nerves, then recessions just before consumers/workers lose their temper. This, in a nutshell, is the essence of our "economic cycles" policies and the rest depends on the appraisal of the risks, the twist of the wrist, and the clown's talent for juggling crystal-ware.

The magic wand

It may look like our juggling act has been quite erratic for a while, but in fact it has been nothing short of miraculous, because behind an apparently inept juggling used to distract our attention, was hidden an act of great and potent magic. There is one well-known way always to give and never to ask for anything in return : it is called "robbing Peter to pay Paul". Except that, in this case, Peter gives his consent, so we call it "borrowing". While the juggling with interest rates went on, the issuer of power chips, which is also a debtor, could borrow all it needed and pay its debts with inflation. The State began to cheat a little and to use this discreet source of income at its disposal. Better than direct and indirect taxation, "borrowing" has become the third and best way to finance the State. Over the last three decades, the public debt has increased every year without any significant exception. Only twice, during all these years, has the State paid back to the Peter-Haves some of the money it has been borrowing from them to maintain the Paul-Have-nots at the consumption level and keep the production system operational. In the years it did, the public debt decreased by less than 1%; over the period, it increased by 600% !

It is not just borrowing, but borrowing plus an inflation that has wiped away, over the last 15 years only, 66 % of the value of these State-issued power chips that so aptly remind the mark that he should have put his trust in God rather than in money. We may be hypnotized by the one trillion dollar public debt of 1981... or realize that, thanks to inflation, it represented then less than 35% of the Gross National Product, while the "modest" $256 billion debt of 1950 meant, at the time, 96.9% of GNP and a much heavier burden. We quietly got rid of almost two-thirds of the burden during these three decades, although at no time were any significant repayments ever made. Magic.

With a negative real yield, the all-important credibility of the State should have become disastrous and the wise money should have been out of the Treasury Bills and Bonds' market log ago! Not so... for the truth is that there is simply no other place for Big Money to go that would not instantly depress the market and defeat the purpose. With the huge surplus of capital floating around, and the recognized and accepted need for some redistribution, a reasonable negative yield on risk-free capital is seen as a social bargain and the State can write its own ticket with investors.

It may be a tough ticket: the late Seventies and early Eighties' combined rates of inflation and progressive taxation worked like a hidden tax on capital to redistribute an average $300 billion a-year! Inflation financing, then, discreetly amounted to the equivalent of more than half the budget of the State.

Inflation is the essence of modern financial magic. Dark witchcraft if it is merely a tool for speculation, but benevolent white magic if it contributes to equilibrium. Rather than deny evidence, the time may have come to stop toying with financial gears and wheels that do not respond and to make full use of the potent Olde Magick... We must learn to handle the magic wand with greater gusto, though, for there is much more to inflation than just borrowing; it must be a whole financing approach.


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