September 20, 2018

Gilligan, The Skipper, and the Federal Reserve

Now here’s another tale of our castaways.

Imagine if life on the island were different. Instead of seven stranded castaways, there were only four: Gilligan, the Skipper, Mr. Howell, and Ben Bernanke.

Besides non-existent ratings without Ginger and Mary Ann, some other things would be different. Imagine that there was only one thing to buy on the island, coconuts. Now, of course, this takes a willing suspension of disbelief, because we know that these four people would need more than just coconuts to survive. They would need clothing and shelter and might want other comforts that the island might conceivably provide. They would all provide different services to each other and trade them for the services of their fellow castaways. But in this example, the only thing that they trade for are coconuts.

Mr. Howell owns the coconut orchard, which produces 100 coconuts per year. Mr. Bernanke is in charge of the currency, the Island Reserve Notes (IRNs). In order to purchase the only available product for sale on the island, one must use IRNs. Barter or the use of other commodities to make this purchase is prohibited. Each coconut costs 1 IRN.

Gilligan and the The Skipper each perform different services for each other and the other two which they trade for these paper notes in order to buy coconuts. At a given point in time, Gilligan and The Skipper each have 50 IRNs.

There are a few things that are true. The first is  that the IRNs held by Gilligan and the Skipper have no value of their own. Their value is wholly derived from the coconuts that they can buy with the IRNs. Neither do the ISNs have any value off the island. Back in civilization, the currency is not recognized, although if a mainlander were to acquire some IRNs, he would be able to purchase coconuts with them if he ever found himself stranded on the island.

Secondly, Gillligan and the Skipper are equally wealthy, not because they both have the same amount of IRNs, which don’t have any intrinsic value, but because they are both able to buy an equal quantity of the available products. They are each able to buy one half of all coconuts produced in one year in Mr. Howell’s orchard. In other words, each has the same purchasing power in the island economy.

Now, suppose Mr. Bernanke decided to print 5 additional IRNs and give them to the Skipper. The Skipper would immediately be wealthier, as his  purchasing power has now increased by 10 percent. He can now buy 55 coconuts instead of 50. But where did this new purchasing power come from? Was it really created out of thin air just by printing additional IRNs?

Mr. Bernanke might say yes. However, there are still only 100 coconuts available to purchase. Since there is no way for Mr. Howell’s orchard to produce more than 100 coconuts during the current year, it would seem that Gilligan can still buy 50 coconuts, the Skipper can likewise buy 50 and his 5 additional IRNs are worthless until there are more coconuts available to purchase. How can the Skipper take advantage of the additional IRNs?

Obviously, there is only one way. Rather than trading 1 IRN for each coconut, the Skipper will now offer Mr. Howell more than $1.00 IRN per coconut. While he may offer different prices at different times, depending upon how hungry he is, let’s say that the average price he offers Mr. Howell over the year is $1.05. This is the new market price, which Gilligan has to pay as well. Mr. Howell certainly isn’t going to sell coconuts to Gilligan at 1 IRN apiece when he can get 1.05 from the Skipper. So, with Gilligan and the Skipper each paying on average 1.05 per coconut, the Skipper is now able to buy 52.4 coconuts, while Gilligan can only buy 47.6.

What we have seen is a transfer of wealth. The Skipper is now 2.4 coconuts wealthier. However, this new purchasing power was not magically created simply by printing the 5 extra IRNs. It was transferred from Gilligan, who can now afford only 47.6 coconuts, even though he has the same amount of IRNs that he had before. No one snuck into Gilligan’s hut and removed any of his money. He still has the exact same amount. But he has been robbed nonetheless. Regardless of how laudable the reasons given for printing the new IRNs and giving them to the Skipper – to stimulate the economy, create new jobs, etc. – it was nevertheless accomplished through theft.

It should also be noted that no additional wealth has been created. The total number of coconuts that Gilligan and the Skipper are able to purchase is still 100. The wealth has simply been redistributed from Gilligan to the Skipper. Imagine if this were to go on for decades. At some point, the Skipper would be fabulously wealthy and Gilligan would be destitute.

Now, the only reason that this theft is possible is the law that forces Gilligan to use the IRNs. If he were able to pick bananas and offer them in trade for the coconuts, he might be able to produce enough in bananas to buy more coconuts than the Skipper. Only the power invested in Mr. Bernanke allows him to transfer wealth and it is the only power he has. He doesn’t produce a single coconut himself. He simply decides how those coconuts are going to be distributed.

One might also argue that the Skipper might invest the extra 5 IRNs in capital goods and thus expand production on the island. It is possible. However, it is less likely that the Skipper is going to make wise decisions on what capital goods to invest in with purchasing power that was stolen from someone else than with money he saved himself. After all, if he decides to invest in a scheme that doesn’t pan out, he can go back to Mr. Bernanke and get more IRNs. In reality, these funds are loaned to the Skipper and he must pay them back with interest. However, he is really getting an involuntary loan from Gilligan and using Gilligan’s purchasing power to acquire capital goods. Each time he does, he becomes wealthier and Gilligan becomes poorer. Adding insult to injury, the Skipper gets to retain ownership of the new capital goods and keep all of the profits from the investment – with the cost of the investment provided by Gilligan!

Eventually, production might expand, but it will have expanded far less than if the Skipper had been forced to accumulate his capital by consuming less coconuts. This would put downward pressure on the price of coconuts, making Gilligan wealthier while the Skipper became wealthier still once he realized a return on his investment.

Of course, no economy is this simple. There is never only one product or service to purchase in any economy. Neither have we accounted for the coconuts that Mr. Howell consumes, nor for the presence of Ginger, Mary Ann, the professor, or Mrs. Howell, who could all conceivably produce other products or services to offer each other in the island economy.

However, even if there were seven castaways – or 300 million – the principle would remain the same. There would be some finite amount of wealth that all of their efforts combined could produce. All other factors being equal, printing new IRNs and distributing them unequally among the inhabitants would produce the same increase in prices and the same redistribution of wealth.

The only honest way to expand production would be for some of the islanders to save some of their earnings and invest them in capital goods. This would have the effect of raising the overall wealth of the island and any disparity in individual wealth would be the result of those individuals producing more for the other islanders to consume, not from redistribution through the production of new paper currency.  Moreover, since production could only be expanded by real savings, instead of by a privilege granted by Mr. Bernanke, they would all have an equal opportunity to save themselves and compete with those producing more. All of these factors would tend to make income disparity decrease, instead of increase as it does under the IRN System.

There is only one question that remains. Why does Gilligan allow the IRN System to continue?

Tom Mullen is the author of A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

>Paulson Says, "He’s Not in This Stove"

>Pretty soon we’re going to need a ramrod with a wet sponge to swab down the barrel of Treasury Secretary Henry Paulson’s bazooka. In another emergency meeting on Friday, this time to discuss what to do about the (again) bankrupt Lehman Brothers, Paulson, Federal Reserve President Timothy Geithner, SEC Chairman Christopher Cox, and what Fed spokeswoman Michelle Smith would only name as “senior representatives of major financial institutions” met at Geithner’s offices at the New York Fed. As reported by Martin Crutsinger, AP Economics Writer, “the Wall Street Journal reported on its website that this group included Morgan Stanley chief executive John Mack and Merrill Lynch chief executive John Thain among others.”

So, another investment bank goes bankrupt and again we have the U.S. government, its private banking monopolist, and the investment bank’s two chief competitors getting together to figure out what to do. It is refreshing that at least there is no longer any pretence that the U.S. financial sector is a free market, rather than a cartel. Of course, history shows that tight collusion between government and large corporations is the best thing for a society that wants to remain free, open, and prosperous. Just ask the Italians. However, this is not the best news. Crutsinger goes on to say,

“Earlier in the day a person familiar with Paulson’s thinking said that the treasury secretary was opposed to the use of any government money to bail Lehman Brothers out of its financial difficulties.”

If you’ve been paying attention for the past few months, your reaction should be something on the order of “here it comes.” Of course, this is merely “a person familiar with Paulson’s thinking” (which should qualify him or her for a purple heart) telling us that no bailout is coming. The real news will not come until sometime after Paulson holds a press conference and tells us that the U.S. government absolutely, positively will not bail out Lehman Brothers. At this point, those press conferences are starting to sound like Bugs Bunny telling the Irish cop “he’s not in this stove.” By now, we should all be saying, “Oooohhhh! So you’re hiding Rocky in the stove, are you?” As long as he remains this consistent, his communication to the American public has become quite effective. Just assume that he is about to do exactly the opposite of what he says.

Considering that Paulson and Bernanke are both Bush appointees, it is fair to characterize this “strategy” as a Republican strategy. This is significant because it points to one identifiable difference between the two major parties. Neither wants to cut government spending and both are equally socialist. However, the Republicans wish to keep tax cuts in place, while the Democrats want to raise taxes. While the Republican strategy might seem perversely illogical at first glance, it is not. They are simply going to run deficits and steal your money through inflation. They are going to talk about free markets and capitalism and give you fascist socialism.

On the other hand, if you paid attention to the primary races and have read Barack Obama’s platform, it has become clear that the Democrats really make no secret that they are going to give you the closest thing to communism that they feel like they can get away with. They will steal your money through direct taxation.[1] Perhaps that makes them more honest. I knew I’d finally find something nice to say about them.

So, the Republicans will say, “I’m not going to steal your money,” and then steal your money, while the Democrats will come right out and say, “I’m going to steal your money,” and then steal your money. Well, at least Americans can’t complain that they don’t have any choices. Of course, we may wake up in four years wondering where the last vestiges of our freedom have gone. However, with the government in the housing business, the mortgage business, the healthcare business, and perhaps even dabbling in energy, at least we will have a good idea about where to look. Just don’t bother to come out and ask your government, because you already know what they’ll say.

It’s not in this stove…

[1] Of course, inflation will not end with Democratic rule, as the Fed really does whatever it wants. However, the Democrats have at least proven that it is incidental to their agenda. If they had it all their way, they’d just take all of your money directly through taxation.

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